Employment Tax
SUI, SIT, Local Tax,
Property Tax,
and Sales & Use Tax Explained

Author

Jeff Aleixo

State Unemployment Tax

Employers pay state unemployment insurance contributions based on what they pay their employees, up to a certain state wage base. Some states use the same wage base as the federal wage base of $7,000, others do not.

SUTA

Taxes under State Unemployment Tax Act (SUTA) are those designed to finance the cost of state unemployment insurance benefits in the United States, which make up all of unemployment insurance expenditures in normal times, and the majority of unemployment insurance expenditures during downturns, with the remainder paid in part by the federal government for emergency benefit extensions.

This tax is experience rated which means that tax rates are firm-specific and the rate a firm faces updates each year to reflect the cost of the benefits that firm’s former employees have received recently. Because it is primarily companies in stress that generate layoffs, these tax increases target firms that are already under strain. For this reason, states limit how high they allow taxes to rise, but these limits vary from state to state.

The second unique feature of UI taxes under SUTA is that the taxable base is on average ~$10,000 per employee, much less than the average yearly earnings of a given worker. Because of this feature, companies pay a fixed lump sum tax per worker they employ. This provides a modest incentive for firms to reduce unskilled and part-time work in favor of skilled and full-time work.

2018 State Unemployment Insurance Taxable Wage Base

2018 State Unemployment Insurance Taxable Wage Base

State

2018 Wage Base

2017 Wage Base

% Decrease
/Increase

Alabama

$8,000

$8,000

Alaska

39,800

Arizona

7,000

7,000

Arkansas

10,000

12,000

-16,67%

California

7,000

7,000

Colorado

12,600

12,500

+0,61%

Connecticut

15,000

15,000

Delaware

16,500

18,500

-10,81%

District of Columbia

9,000

9,000

Florida

7,000

7,000

Georgia

9,500

9,500

Hawaii

40,000

Idaho

38,200

37,800

+1,06%

Illinois

12,960

12,960

Indiana

9,500

9,500

Iowa

29,900

29,300

+2,05%

Kansas

14,000

14,000

Kentucky

10,200

10,200

Louisiana

7,700

7,700

Maine

12,000

12,000

Maryland

8,500

8,500

Massachusetts

15,000

15,000

Michigan

9,500

Minnesota

32,000

32,000

Mississippi

14,000

14,000

Missouri

12,500

13,000

-3,85%

Montana

32,000

31,400

+1,91%

Nebraska

9,000

9,000

Nevada

30,500

29,500

+3,39%

New Hampshire

14,000

14,000

New Jersey

33,700

33,500

+0,60%

New Mexico

24,200

24,300

-0,41%

New York

11,100

10,900

+1,83%

North Carolina

23,500

23,100

+1,73%

North Dakota

35,100

Ohio

9,500

9,000

+5,55%

Oklahoma

17,600

17,700

-0,56%

Oregon

39,300

38,400

+2,56%

Pennsylvania

10,000

9,750

+2,56%

Puerto Rico

7,000

Rhode Island

22,400

South Carolina

14,000

14,000

South Dakota

15,000

15,000

Tennessee

8,000

8,000

Texas

9,000

9,000

Utah

34,300

33,100

+3,63%

Vermont

17,600

17,300

+1,73%

Virgin Island

23,500

Virginia

8,000

8,000

Washington

47,300

45,000

+5,11%

West Virginia

12,000

12,000

Wisconsin

14,000

14,000

Wyoming

24,700

25,400

-2,76%

State unemployment taxes are one of the few taxes that can be significantly lowered when handled properly. Outsourcing relieves an employer from the time, cost, and aggravation associated with unemployment administration.

SUTA Dumping

SUTA Dumping is a tax evasion practice involving the manipulation of an employer’s unemployment insurance (UI) tax rate to achieve a lower rate, and thereby pay less UI taxes.  Typically, SUTA Dumping occurs when a business transfers payroll out of an existing company or organization to a new or different organization solely or primarily to reduce UI taxes.

There are several ways in which SUTA Dumping harms employers and states’ UI trust fund.

  • SUTA Dumping goes against the fundamental tenet of an experience-rated tax system that is widely supported by the employer community.  The UI tax rate is based on an employer’s history of benefit charges. With SUTA Dumping, an employer with a high UI tax rate attempts to hide behind a different company with a lower tax rate and dump their UI costs on all other employers.
  • SUTA Dumping creates a competitive cost advantage for employers practicing UI tax evasion.
  • SUTA Dumping reduces money in UI trust funds, causing an increase in unemployment tax rates for all employers.
  • SUTA Dumping reduces funds available to pay unemployment benefits to unemployed workers.
  • SUTA Dumping puts those employers at a disadvantage who try to manage their work and maintain steady employment for their employees as SUTA Dumping allows charges that are never paid for by the business.
  • SUTA Dumping rewards employers for dumping their UI responsibility for past benefit charges on the rest of employers.

Although only a small percentage of employers are involved in SUTA Dumping, all employers are impacted because the “escaped responsibility for benefits paid” ends up with the rest of them.

Penalties for Engaging in SUTA Dumping

If employers participate in a SUTA Dumping practice and are discovered, they run the risk of paying a penalty that would amount to four times any savings they would have received by manipulating tax rate, if it is found to be intentional. UI tax rate would also be increased to the maximum tax rate (but not less than a 2% increase), for the year in which it was determined that employers engaged in intentional SUTA Dumping, and for the next three years.  A new civil penalty of up to $5,000 will apply if a person simply advises another business to participate in SUTA Dumping and is not an employer.

State Income Tax

Most individual U.S. states collect a state income tax in addition to federal income tax. Some local governments also impose an income tax, often based on state income tax calculations. Forty-three states and many localities in the United States may impose an income tax on individuals. Forty-seven states and many localities impose a tax on the income of corporations.

State income tax is imposed at a fixed or graduated rate on taxable income of individuals, corporations and certain estates and trusts, and rates vary by state. Taxable income conforms closely to federal taxable income in most states, with limited modifications. The states are prohibited from taxing income from federal bonds or other obligations. Most do not tax Social Security benefits or interest income from obligations of that state. Several states require different useful lives and methods to be used by businesses in computing the deduction for depreciation. Many states allow a standard deduction or some form of itemized deductions. States allow a variety of tax credits in computing tax.

Each state administers its own tax system. Many states also administer the tax return and collection process for localities within the state that impose income tax.

Basic Principles

State tax rules vary widely. The tax rate may be fixed for all income levels and taxpayers of a certain type, or it may be graduated. Tax rates may differ for individuals and corporations.

Most states conform to federal rules for determining:

  • gross income,
  • timing of recognition of income and deductions,
  • most aspects of business deductions,
  • characterization of business entities as either corporations, partnerships, or disregarded.

Gross income generally includes all income earned or received from whatever source, with exceptions. The states are prohibited from taxing income from federal bonds or other obligations. Most states also exempt income from bonds issued by that state or localities within the state, as well as some portion or all of Social Security benefits. Many states provide tax exemption for certain other types of income, which varies widely by state. The states imposing an income tax uniformly allow reduction of gross income for cost of goods sold, though the computation of this amount may be subject to some modifications.

Income tax is self-assessed, and individual and corporate taxpayers in all states imposing an income tax must file tax returns in each year their income exceeds certain amounts determined by each state. Returns are also required by partnerships doing business in the state. Many states require that a copy of the federal income tax return is attached to at least some types of state income tax returns. The time for filing returns varies by state and type of return, but for individuals in many states the federal deadline is usually April 15.

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Individual Income Tax

Forty-three states impose a tax on the income of individuals, sometimes referred to as personal income tax. State income tax rates vary widely from state to state. The states imposing an income tax on individuals tax all taxable income of residents, as defined in the state.

All states that impose an individual income tax allow most business deductions. However, many states impose different limits on certain deductions, especially depreciation of business assets. Most of the states allow non-business deductions in a manner similar to federal rules. Few allow a deduction for state income taxes, though some states allow a deduction for local income taxes. Six of the states allow a full or partial deduction for federal income tax.

Some states allow cities and/or counties to impose income taxes. For example, most Ohio cities and towns impose an income tax on individuals and corporations. By contrast, in New York, only New York City and Yonkers impose a municipal income tax.

States with No Income Tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not impose an income tax. However, Tennessee and New Hampshire do not levy an income tax on earned income, but they do tax interest and dividends, New Hampshire at a rate of 5 percent and Tennessee at 3 percent as of 2018.

States with Flat Tax Rates

The following eight states have a flat rate individual income tax as of 2016:

  • Colorado: 4.63 percent
  • Illinois: 4.95 percent
  • Indiana: 3.23 percent
  • Massachusetts: 5.1 percent
  • Michigan: 4.25 percent
  • North Carolina: 5.499 percent
  • Pennsylvania: 3.07 percent
  • Utah: 5 percent

The remaining 33 states and the District of Columbia charge a progressive tax on all income.

The Rates and The Income Thresholds for Single Filers as of January 1, 2018

Alabama:

2 to 5 percent. The highest rate applies to incomes over $3,000.

Arizona:

2.59 to 4.54 percent. The highest rate applies to incomes over $152,688.

Arkansas:

0.9 to 6.9 percent. The highest rate applies to incomes over $35,100.

California

1 to 12.3 percent. The highest rate applies to incomes over $551,473.

Connecticut:

3 to 6.99 percent. The highest rate applies to incomes over $500,000.

Delaware:

0 to 6.6 percent. The highest rate applies to incomes over $60,000.

Georgia:

1 to 6 percent. The highest rate applies to incomes over $7,000.

Hawaii:

1.4 to 11 percent. The highest rate applies to incomes over $200,000.

Idaho:

1.6 to 7.4 percent. The highest rate applies to incomes over $11,043.

Iowa:

0.36 to 8.98 percent. The highest rate applies to incomes over $71,910.

Kansas:

3.1 to 5.7 percent. The highest rate applies to incomes over $30,000.

Kentucky:

2 to 6 percent. The highest rate applies to incomes over $75,000.

Louisiana:

2 to 6 percent. The highest rate applies to incomes over $50,000.

Maine:

5.8 to 7.15 percent. The highest rate applies to incomes over $50,750.

Maryland:

2 to 5.75 percent. The highest rate applies to incomes over $250,000.

Minnesota:

5.35 to 9.85 percent. The highest rate applies to incomes over $160,020.

Mississippi:

3 to 5 percent. The highest rate applies to incomes over $10,000.

Missouri:

1.5 to 5.9 percent. The highest rate applies to incomes over $9,253.

Montana:

1 to 6.9 percent. The highest rate applies to incomes over $17,900.

Nebraska:

2.46 to 6.84 percent. The highest rate applies to incomes over $30,420.

New Jersey:

1.4 to 8.97 percent. The highest rate applies to incomes over $500,000.

New Mexico:

1.7 to 4.9 percent. The highest rate applies to incomes over $16,000.

New York:

4 to 8.82 percent. The highest rate applies to incomes over $1,077,550.

North Dakota:

1.1 to 2.9 percent. The highest rate applies to incomes over $424,950.

Ohio:

0 to 4.997 percent. The highest rate applies to incomes over $213,350.

Oklahoma:

0.5 to 5 percent. The highest rate applies to incomes over $7,200.

Oregon:

5 to 9.9 percent. The highest rate applies to incomes over $125,000.

Rhode Island:

3.75 to 5.99 percent. The highest rate applies to incomes over $142,150.

South Carolina:

0 to 7 percent. The highest rate applies to incomes over $14,860.

Vermont:

3.55 to 8.95 percent. The highest rate applies to incomes over $416,700.

Virginia:

2 to 5.75 percent. The highest rate applies to incomes over $17,000.

West Virginia:

3 to 6.5 percent. The highest rate applies to incomes $60,000.

Wisconsin:

4 to 7.65 percent. The highest rate applies to incomes over $252,150.

District of Columbia:

4 to 8.95 percent. The highest rate applies to incomes over $1 million.

Tax Accounting

Tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.

Tax accounting is the means of accounting for tax purposes. It applies to everyone – individuals, businesses, corporations and other entities. Even those who are exempt from paying taxes must participate in tax accounting. The purpose of tax accounting is to be able to track funds associated with individuals and entities.

Tax Principles vs. GAAP

In the United States, there are two sets of principles that are used when it comes to accounting, which are different and should not be confused. The first are tax accounting principles and the second are financial accounting, or generally accepted accounting principles (GAAP).

Under GAAP, companies must follow a common set of accounting principles, standards and procedures when they compile their financial statements by accounting for any and all financial transactions. Balance sheet items can be accounted for differently when preparing financial statements and tax payables.

While accounting encompasses all financial transactions to some degree, tax accounting focuses solely on those transactions that affect an entity’s tax burden, and how those items relate to proper tax calculation and tax document preparation. Tax accounting is regulated by the Internal Revenue Service (IRS) to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers. The IRS also requires the use of specific documents and forms to properly submit tax information as required by law.

Tax Accounting for An Individual

For an individual taxpayer, tax accounting focuses solely on items such as income, qualifying deductions, investment gains or losses, and other transactions that affect the individual’s tax burden.

Tax Accounting for A Business

From a business perspective, more information must be analyzed as part of the tax accounting process. While the company’s earnings, or incoming funds, must be tracked just as they are for the individual, there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations. This can include funds directed towards specific business expenses as well as funds directed towards shareholders.

Tax Accounting for a Tax-Exempt Organization

Even in instances where an organization is tax-exempt, tax accounting is necessary. This is due to the fact that all organizations must file annual returns. They must provide information regarding any incoming funds, such as grants or donations, as well as how the funds are used during the organization’s operation. This helps ensure that the organization adheres to all laws and regulations governing the proper operation of a tax-exempt entity.

Automated system ensures limiting potential penalties by identifying compliance issues while generating refunds and future savings where allowable by statute.

Property Tax

Property taxes are the primary source of revenue for local governments in the United States. The money collected from property taxes provides funds for local fire departments, law enforcement, public education, road construction, and other public services.

Property tax assessment procedures vary by state, county, and city, as well as zoning areas within localities. While each local government has its own procedure for assessing and taxing real estate, the general formula for property tax is as follows:

Annual Budget – Sales Tax Revenue ÷ State Aid = Property Tax

In the past, property tax rates have been relatively stable, with only mild fluctuations. As property appreciates in value, local taxing authorities are able to collect more revenue based on higher assessed values, using the same tax rate. However, with the marked decline in property values and the growing need for local revenue, property tax rates are on the rise to fill the gap.

It is important to note that the assessed value and the appraisal value of a property are determined by different entities and are rarely in concurrence. In assessing the value of real estate for property tax purposes, there are 3 standard approaches that are employed. These include the following:

  1. Cost Approach – First the estimated value of the land without improvements is determined. Then, the replacement or reproduction value of improvements to the property, minus the accrued depreciation of said improvements, is added to determine an assessed value.
  2. Sales Comparison Approach – The sales prices of comparable homes in the area are averaged to determine the assessed value of the property.
  3. Income Approach – For income-producing properties, such as a lease or rental property, a mathematical system called capitalization is used. Using capitalization, the estimated income of the particular property is also a variable in the tax formula, contributing to the calculation of assessed value for property tax purposes.

The simplest approach for assessing the value of real estate tends to be the sales comparison approach. However, it is not necessarily the most accurate.

The cost approach is much more involved and takes into account a myriad of factors because specific property improvements are identified in enough detail to determine reproduction costs. These can include materials to construct the foundation, construction of structural and finish walls, roofing, heat and/or air conditioning, types of appliances, septic system, whether water is supplied by well or public utilities, the condition and age of the improvements, and more.

How often property’s value is re-assessed also varies from region to region. In some areas, real estate is assessed on an annual basis, while other areas conduct assessments every two years. Above all, it is important to remember that property taxes are not based on the purchase price of a home, but on the assessed value of the property.

Local Tax

A local tax is tax assessed and levied by a local authority such as a state, county or municipality. A local tax is usually collected in the form of property taxes, and is used to fund a wide range of civic services from garbage collection to sewer maintenance. The amount of local taxes may vary widely from one jurisdiction to the next. Local tax is also referred to as municipal tax.

Through the U.S. Constitution, the federal government has the authority and the states have the right to impose taxes on their residents. State taxes are collected to fund local government projects, such as water and sewer improvements, law enforcement and fire service, education and health services, road and highway construction, public servants, and other services which benefit the community-at-large.

State, county, and municipal taxes are referred to as local taxes given that they are levied at levels lower than the federal government. Unlike federal taxes, the benefits arising from local taxes are generally apparent at the community level. Municipalities have to face a constant balancing act with regards to levying local taxes, since raising taxes may lead to taxpayer revolt, while low taxation levels may lead to a cutback of essential services.

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Sales and Use Tax

There is no federal sales or use tax in the United States. All but five states impose sales and use taxes on retail sale, lease and rental of many goods, as well as some services. Many cities, counties, transit authorities and special purpose districts impose an additional local sales or use tax. Sales and use tax is calculated as the purchase price times the appropriate tax rate. Tax rates vary widely by jurisdiction from less than 1% to over 10%.

Sales tax is collected by the seller at the time of sale. Use tax is self-assessed by a buyer who has not paid sales tax on a taxable purchase.

Unlike value added tax, sales tax is imposed only once, at the retail level, on any particular goods. Nearly all jurisdictions provide numerous categories of goods and services that are exempt from sales tax, or taxed at a reduced rate. Purchase of goods for further manufacture or for resale is uniformly exempt from sales tax. Most jurisdictions exempt food sold in grocery stores, prescription medications, and many agricultural supplies.

Sales taxes, including those imposed by local governments, are generally administered at the state level. States imposing sales tax require retail sellers to register with the state, collect tax from customers, file returns, and remit the tax to the state. Procedural rules vary widely. Sellers generally must collect tax from in-state purchasers unless the purchaser provides an exemption certificate. Most states allow or require electronic remittance of tax to the state. States are prohibited from requiring out of state sellers to collect tax unless the seller has some minimal connection with the state.

employment-tax-compliance
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