FICA Tax Guide 2023: Payroll Tax Rates & Definition

Shleifer (1985) first proposed comparing regulated franchises in order to determine efficiency. Salmon (1987) extended Shleifer’s work to look at subnational governments. Besley and Case (1995) showed that “yardstick competition” affects voting behavior, and Bosch and Sole-Olle (2006) further confirmed the results found by Besley and Case.

(Mississippi also has a flat rate and scores well, though that single rate kicks in after $10,000 in income due to a “zero bracket.”) States with high kick-in levels score the worst. These include New York ($25 million); California, Massachusetts, and New Jersey ($1 million); and Connecticut ($500,000). Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes. When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent. Therefore, states with more competitive tax systems score well in the Index because they are best suited to generate economic growth. On January 1, 2024, Georgia will transition from a graduated individual income tax with a top rate of 5.75 percent to a flat tax structure with a rate of 5.49 percent.

This provision helps to mitigate the nonneutralities of the UI tax. These taxes are levied on employers when a state’s unemployment fund falls below some defined level. Twenty-nine states have a solvency tax on the books, though they fall under different names, such as solvency adjustment tax (Alaska), supplemental assessment tax (Delaware), subsidiary tax (New York), and fund balance factor (Virginia). States are rewarded for each of these exclusions because they nudge a UI system toward neutrality.

  • States have different definitions of taxable income, and some create greater impediments to economic activity than others.
  • The federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) lowered the federal estate tax rate through 2009 and eliminated it entirely in 2010.
  • However, that same law will also newly conform New Jersey to the 80 percent federal limitation on NOL carryforwards without adopting a corresponding unlimited recovery period included in federal law.

A wage base limit applies to employees who pay Social Security taxes. This means that gross income above a certain threshold is exempt from this tax. This income ceiling is also the maximum amount of money that’s considered when calculating the size of Social Security benefits. The unemployment insurance tax component of the Index consists of two equally weighted subindices, one that measures each state’s rate structure and one that focuses on the tax base. Unemployment insurance taxes comprise 11.1 percent of a state’s final Index score.

How to report FICA taxes

Specifically, the state saw gains on the individual tax component by eliminating the marriage penalty. On the property tax front, Oklahoma’s split roll ratio has narrowed, and the state repealed its capital stock tax, causing the property tax component ranking to soar from 30th to 15th. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies generally accepted industry practices to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. Overall, Oklahoma now ranks 19th, a gain of four positions compared to last year.

Other states with high local option sales taxes include Colorado (4.89 percent), New York (4.53 percent), and Oklahoma (4.49 percent). This improves the explanatory power of the State Business Tax Climate Index as a whole because components with higher standard deviations are those areas of tax law where some states have significant competitive advantages. Businesses that are comparing states for new or expanded locations must give greater emphasis to tax climates when the differences are large. On the other hand, components in which the 50 state scores are clustered together, closely distributed around the mean, are those areas of tax law where businesses are more likely to de-emphasize tax factors in their location decisions. For example, Delaware is known to have a significant advantage in sales tax competition, because its tax rate of zero attracts businesses and shoppers from all over the Mid-Atlantic region. That advantage and its drawing power increase every time another state raises its sales tax.

The payer deducts, or withholds, the tax from the payee’s income. The more tax deductions and credits you claim, the less money your employer will withhold from your paycheck. So, it’s important to make sure you accurately fill out your W-4 Form and that you update your information on that form when needed.

Such an exemption, however, also benefits grocers and higher-income residents, and creates additional compliance costs due to the necessity of maintaining complex, ever-changing lists of exempt and nonexempt products. Public assistance programs such as the Women, Infants, and Children (WIC) program or the Supplement Nutrition Assistance Program (SNAP) provide more targeted assistance than excluding groceries from the sales tax base. Thirteen states include or partially include groceries in their sales tax base. Throwback and throwout rules for sales of tangible property add yet another layer of tax complexity. Since two or more states can theoretically lay claim to “nowhere” income, rules have to be created and enforced to decide who gets to tax it. States with corporate income taxation are almost evenly divided between those with and without throwback rules.

FICA taxes vs. self-employment taxes (SECA)

States that use federal definitions of income reduce the tax compliance burden on their taxpayers. Two states (Arkansas and Mississippi) do not conform to federal definitions of corporate income, and they score poorly. However, businesses sort out the costs and benefits of taxes differently from individuals. For businesses, which can be more mobile and must earn profits to justify their existence, taxes reduce profitability. Theoretically, businesses could be expected to be more responsive than individuals to the lure of low-tax jurisdictions. Research suggests that corporations engage in “yardstick competition,” comparing the costs of government services across jurisdictions.

In order to solve this problem, scores on the five major components are “normalized,” which brings the average score for all of them to 5.00, excluding states that do not have the given tax. This is accomplished by multiplying each state’s score by a constant value. According to Wasylenko, other legislative actions are likely to accomplish more positive economic results because in reality, taxes do not drive economic growth. Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking.

Simplifying FICA tax compliance

DonateAs a 501(c)(3) nonprofit, we depend on the generosity of individuals like you. States with the highest spirits taxes per gallon are Washington ($36.55), Oregon ($22.86), and Virginia ($22.06), while states with the lowest spirits taxes are Wyoming and New Hampshire (both at $0), Missouri ($2), and Colorado ($2.28). The District of Columbia (D.C.) is only included as an exhibit and its scores and “phantom ranks” offered do not affect the scores or ranks of other states. Your employer is also responsible for paying half of the total FICA obligation. We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.

In addition to reducing individual income tax rates across the board, retroactive to January 1, 2023, H.B. 2526, enacted in March 2023, established a set of triggers that could reduce rates further in future years, starting in 2025, subject to revenue availability. If future rates are reduced, West Virginia’s individual tax component score will improve.

HSA Contributions

A business’s experience rating formula determines the rate the firm must pay—whether it will lean toward the minimum rate or maximum rate of the particular rate schedule in effect in the state at that time. The maximum rates in effect in the most recent year range from 5.4 percent (in Alabama, Alaska, Florida, Idaho, Nebraska, Nevada, Oregon, and Vermont) to 19.57 percent (in Massachusetts). Some states attempt to get around the marriage penalty problem by allowing married couples to file as if they were singles or by offering an offsetting tax credit. While helpful in offsetting the dollar cost of the marriage penalty, these solutions come at the expense of added tax complexity. Still, states that allow married couples to file as singles do not receive a marriage penalty score reduction.

2526 was enacted in West Virginia, reducing the state’s individual income tax rates across the board, including reducing the top marginal rate from 6.5 to 5.12 percent, retroactive to January 1, 2023. This law also established triggers to reduce future tax rates, subject to revenue availability. These changes helped improve the state’s ranking on the individual income tax component from 29th to 25th. However, with other states continuing to improve, West Virginia has fallen two places overall, from 20th to 22nd. Minnesota ranks in the bottom half of states on each component of the Index. GILTI was adopted as part of the 2017 Tax Cuts and Jobs Act (TCJA) and can lead to high tax burdens on foreign profits, putting U.S. companies that operate abroad at a disadvantage.

‘Paycheck Checkups’ to Adjust Withholding

However, for most employees the savings will be limited to several hundred dollars per year. As we already noted, the 2023 maximum FSA contribution is $3,050. The average federal income tax rate for American workers in 2020 was 13.6% of taxable income, according to the Tax Foundation. Simply multiply employers and employees or self-employed gross pay by the Social Security and Medicare tax rates. The tax rates shown above do not include
an additional 0.9 percent in Medicare taxes paid by highly compensated employees.