Except for specific individuals who are exempt, the majority of us have to pay federal income taxes. What we pay is based on our yearly income, which determines the tax bracket we fall under. In addition to paying taxes to Uncle Sam, you may also have to pay state income taxes. The amount you pay in state income tax is dependent on where you live, with state tax rates ranging from zero to 13.3 percent.
Does my income tax change if I am self-employed vs. an employee?
Those who are self-employed – either as a sole proprietor, partner in a partnership, or member of an LLC or S corporation - can take advantage of several tax breaks. But one area in which they don’t get a break is with self-employment tax, which is a federal tax.
The good news is that there are no self-employed state taxes. Therefore, your self-employment tax will be the same no matter where you live.
The self-employment tax (also referred to as SECA) includes Social Security tax and Medicare tax. Of note, FICA tax is Social Security/Medicare tax on employment, while self-employment tax is Social Security/Medicare tax on self-employment.
Employers pay half of the FICA tax on behalf of their employees, while those who are self-employed must pay the full amount of Social Security/Medicare tax on their self-employment income. For the 2019 tax year, that rate is 15.3 percent on the first $132,900 of net income, plus 2.9% on net income above $132,900.
What states have the lowest income tax?
If you work in any of the states listed below, you are paying low income taxes compared to other states. The top five states with the lowest 2019 income tax rates are:
- North Dakota (2.90%)
- Pennsylvania (3.07%)
- Indiana (3.23%)
- Michigan (4.25%)
- Arizona (4.54%)
What states have the highest income tax?
If you work in any of these states, you are paying higher state income taxes than anywhere else in the country. The top five states with the highest income tax rates are:
- California (13.30%)
- Hawaii (11.00%)
- New Jersey (10.75%)
- Oregon (9.90%)
- Minnesota (9.85%)
What states have no income tax?
The seven states listed below have no income tax at all, so if you don’t work there already, you might want to consider these states if a relocation is in your future. Although Tennessee and New Hampshire also don’t have income tax, residents still have to pay taxes on interest and dividends income at rates of 2 percent and 5 percent respectively.
- South Dakota
Does the tax burden change for states with lower income tax?
The answer is no, not necessarily. Your tax burden is not just federal and state income taxes. It also includes property taxes, sales tax, and other local taxes. States with lower income tax rates may have higher property taxes or sales tax. Texas is one example, which has no income tax, but it’s residents have to pay the sixth highest property tax rate (1.86 percent) in the country.
Looking at state income taxes is certainly one consideration when deciding which state you’d like to live and work in. However, it’s only one of many other expenses which factor into the cost of living in any state.