What is State Income Tax Withholding?

By hrlineup | 17.12.2020

Business owners face a myriad of responsibilities by virtue of being in business and having employees. One of these responsibilities is withholding tax. It involves deducting income tax from their employees, and then submitting this deduction to the state department. This means that the person paying for income remits, rather than the person receiving the income. To get this right, there are several things that employers need to know. Simply, tax is calculated from the gross pay, and then the next step comes in – state income tax withholding.

State income taxes withheld do not follow a one size fits all approach, they vary from state to state, with some states not even implementing them at all. As an employer, you need to begin by determining which are the wages within your state that are subject to income tax withholding.

Once that is clear, you will then begin to calculate the withholding tax and the deduct these from the employee pay checks. Following these deductions, you will have a net pay amount. All the amounts that have been withheld are to be placed in a separate liability account then forwarded to the state.

What is included in state income taxes withheld?

The calculation begins with the amount of income that is subject to tax. When withholding tax on wages, what is normally included is social security, income tax as well as Medicare. In addition, there are levies that may be included from the different states. A rule of thumb is that the higher the wage, the higher the withholding tax will be by percentage.

State income tax is calculated based on your annual salary, and then divided by the number of weeks or months in the year. This determines how much the employer is expected to remit. Typically, remittances are done once every month.

State Income Tax Withholdings

There are several state income tax withholding rules that employers need to abide by for the sake of their employees. Here are the two main ones: –

  1. Medicare withholding is at 1.45% as a flat rate. However, those earning more $200,000 are subject to an additional 0.9% on their Medicare tax.
  2. Social Security is taxed at 6.2%, up to the annual wage base that is $132,900.

This means that those who earn above this amount do not need to pay social security on any increased amount.

Something interesting to note is that these rates are only withheld as federal withholding tax rates.

The reason that withholding tax is in place is to ensure that tax collection is much easier for the Bureau of Internal Revenue, as well as for the taxpayer. It simplifies the process, limiting the number of bodies that have to be paid by an employee to collect the tax. For employers, it also makes it easier to ensure that income taxes are remitted. The government wins by combating tax evasion and managing those who do not file their tax returns as expected.