State and Local Taxes Small businesses owners are dependent upon each state for their liability when it comes to payroll taxes for due a state because of the business operation. Each state varies, and there are some states that do not withhold tax and require no state income tax filing; Each state requires that an employer deduct and withhold unemployment tax, that is comparatively the same as at the federal level. Generally, however tax rates for the state level on unemployment tax will vary slightly, depending upon the employment history of the business. Once in business long enough, a tax rate can be established based upon the employer’s experience with benefit charges (employees who have drawn unemployment) and taxable payroll. Taxes are deducted in the same manner as federal taxes, each pay period and filed with the applicable state on a monthly basis, just as federal depositors. Many accounting firms, however, recommend a weekly depositor account, so that the employer is not hit with extremely large taxes due. Most states will also require a quarterly information report comparable to the 941 federal forms and referenced in a like manner. Withholding rates on the state level are much lower than the federal rates and there are also limits of liability. Once a particular level is reached in income, just as with social security the tax rate may be reduced or sometimes eliminated. Small businesses operating in one more than one state may find themselves liable for payroll taxes in each state of operation. If you operate in multiple states, but do not maintain a permanent address, you should contact each state of operation to determine your liability and setup the necessary accounts for deductions. Quite often accountants that handle state taxes in your area will be aware of each state’s filing requirements and be able to assist you in your filing requirement needs. The most important concern, as a small business, that you will have on a state level is the unemployment tax that you are assessed. Unemployment compensation is administered on the state level, and can therefore tremendously affect your tax liability. Your tax rating determines your tax liability, and new businesses are given a standard rating until such time has elapsed with operations and paid benefits to assess an individual rating based on employee benefit charges and gross taxable payroll. Local taxes are an even further extension of the employer withholding process, and businesses that operate in a particular state will generally be able to access information about a particular locality via their state’s revenue office. Taxes withheld on the local level will not usually require a separate form, since local government entities will generally require that you file a copy of the state form with their local offices. They do not have the resources to develop separate forms and reporting procedures, and any monies due a local government municipality are forwarded from the state revenue department. Employers will file W-2 information and the information return accompanying W-2’s with the IRS, the state agency, and then with any needed local municipality. There is no social security or Medicare tax withheld at state or local level, there are usually no unemployment taxes withheld at the local level. Businesses are liable for withholding and reporting of the wages earned by each employee, and the timely filing of such withholding and reporting just with the federal and state agencies. Local tax rates are substantially lower than those of the state level, and sometimes are referred to as a permit or license taxes. Some cities charge a flat fee for employees to come into their city and work, and this is especially so if they reside outside the city limits or in another city altogether. Small businesses can refer to individual state requirements via the Department of Revenue, Department of Industrial Relations, Employment offices, or Small Business Administration for direction and assistance in complying with all the necessary state and local laws. If any additional information is needed, it may be obtained thru the IRS website at www.irs.gov . There are numerous publications that provide direction and instructions for small businesses; among them are IRS Publication 15, Circular E Employers Tax Guide, and links to individual state and local websites.