The first consideration business owners make regarding their taxes is the one that involves the federal government. The tax professionals handle the estimation payments each quarter and the income tax returns on the yearly basis, as everyone knows the IRS (Internal Revenue Service) is the leading authority on the field, with their brackets regularly covered by the press.
The state tax is often left out, as it is integrated into the calculation by some accounting software as the final step before the tax return is filed.
As soon as an employee moves to the other side of the state, the company starts selling products or services in the new market, or the business owner themselves relocate, there may appear a whole range of additional taxes due to the state’s regulations.
Tax professionals should know what to do when the withholdings are not enough, the estimated payments are off by a significant amount, or the employer’s income tax is different from the one the employees should pay. It is because each state has its own set of rules and authorities, which are unaware of the other. Even the highest authorities, such as the IRS, are only involved in the resolution process.
This guide covers what federal and state taxes are, the key differences between them, current federal income tax brackets, how the SALT deduction links the two, and the state tax obligations that most often catch businesses off guard.
What is Federal Tax?
Federal tax is levied by the US federal government on all individuals and businesses nationwide. The IRS administers federal taxes, which fund national programs including Social Security, Medicare, national defence, and federal infrastructure.
- Applies uniformly to all US residents and businesses
- Administered by the IRS
- Includes income tax, FICA (payroll), capital gains tax, estate tax, and corporate tax
Despite being separate and having their own sets of rules, tax brackets and procedures, filing both federal and state taxes is necessary for businesses to remain compliant with all tax-related regulations. The two documents are different and serve slightly different purposes, which is why knowing the difference between the two is vital in order to avoid any issues with tax authorities.
What is State Tax?
State tax is charged by individual state governments, each of which sets its own rates, rules, and filing requirements. It's administered by the state's department of revenue or taxation, and it funds state services like education, roads, public safety, and health programs.
Depending on the state, that can include personal income tax, corporate income or franchise tax, sales and use tax, property tax, state unemployment insurance, and in some states, disability insurance or paid family leave contributions. Local governments can add their own income, sales, or property taxes on top.
States With No Personal Income Tax
Nine states don't tax wage income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
No income tax doesn't mean no tax. Washington taxes certain capital gains and charges a business and occupation tax on gross receipts. Texas imposes a franchise tax on many businesses, and Nevada has a commerce tax. These states often rely more heavily on sales and property taxes as well.
The costly mistake isn't misunderstanding federal tax. It's assuming that once the federal side is handled, everything is handled. I've seen owners do careful federal planning all year and then discover they owed income tax in a second state because an employee worked remotely there, or they'd built up a withholding liability in a state they never registered in. State agencies don't send friendly reminders before the penalties start, and they can look back several years.
Ankit Sarawagi, CPA, CA, MBA · LinkedInKey Differences: Federal vs State Tax
| Factor | Federal Tax | State Tax |
|---|---|---|
| Administered by | IRS | State revenue department |
| Rates | 10% to 37% (progressive brackets) | 0% to 13.3% (varies by state) |
| Filing deadline | April 15 | Typically April 15; varies by state |
| Deductibility | Not deductible on federal return | State taxes deductible (SALT) up to $10,000 federal cap |
| Penalties | IRS penalties + interest | State penalties apply separately |
Federal Income Tax Brackets (2025 Tax Year)
| Rate | Taxable Income, Single Filer |
|---|---|
| 10% | $0 to $11,925 |
| 12% | $11,925 to $48,475 |
| 22% | $48,475 to $103,350 |
| 24% | $103,350 to $197,300 |
| 32% | $197,300 to $250,525 |
| 35% | $250,525 to $626,350 |
| 37% | Over $626,350 |
SALT Deduction: Where Federal and State Interact
Since the Tax Cuts and Jobs Act of 2017, the state and local tax (SALT) deduction on your federal return is capped at $10,000 per year. For high earners in high-tax states, this cap means you cannot fully offset state tax costs against federal tax.
Which Should You File First?
Federal and state returns are filed separately with different agencies, but in practice most people complete the federal return first. Many states use federal adjusted gross income or federal taxable income as the starting point for the state calculation, then apply their own additions and subtractions.
If you live in one state and earn income in another, you'll usually file a nonresident return in the state where the income was earned and a resident return in your home state. Your home state generally gives you a credit for tax paid to the other state, so the same income isn't fully taxed twice.
When an e-commerce client hired their first remote senior engineers in California and New York, they updated their federal payroll withholdings but omitted state agency registrations entirely. Because they were focused only on federal compliance, they ran six months of payroll without setting up state unemployment accounts or withholding state income taxes. I conducted an immediate multi-state audit, registered the business with both state revenue boards, and reclassified their payroll retroactively neutralizing over $18,000 in compounding state failure-to-file penalties before year-end returns were due.
Conclusion
Federal and state taxes are two separate systems that happen to share a deadline. Federal rules are the same wherever you are, while state rules change the moment you cross a border, and states increasingly tax businesses based on where they sell and where their people work, not just where they're headquartered.
Plan for both together: track your state exposure as the business grows, understand how the SALT cap and entity-level elections affect your combined bill, and don't assume that a finished federal return means your tax obligations are done.
Profitjets coordinated federal and state tax reviews have helped eligible small-business clients reduce their combined tax burden by an average of $9,000 to $18,000 annually, primarily through better deduction planning, entity-structure reviews, state tax considerations, and more accurate estimated payments.
Book a free consultation and we will map what you owe where.
FAQs
Do I file federal and state taxes separately?
Yes. Federal returns are filed with the IRS, and state returns are filed with each state's tax agency on its own forms. Many states start from figures on your federal return, and deadlines often match, but they're separate filings with separate payments.
Is federal or state income tax higher?
For most taxpayers, federal income tax is the larger bill, with rates from 10 to 37 percent compared with state rates that are usually much lower. In high-tax states, though, the combined top marginal rate can exceed 50 percent. A top earner in California, for example, can face a 37 percent federal rate and a 13.3 percent state rate on their highest dollars of income.
Can I deduct state taxes on my federal return?
Yes, if you itemize deductions. State and local income or sales taxes and property taxes can be deducted together up to the SALT cap, which is $40,400 for 2026 for most taxpayers, with a phase-down for higher incomes. Business owners may also be able to use a state pass-through entity tax election to deduct state income tax at the business level.
Do I have to pay state tax if my business is in a state with no income tax?
You may still owe other state taxes, such as sales tax, franchise or gross receipts taxes, and unemployment insurance. And if you have employees, property, or significant sales in other states, you may owe income tax in those states even though your home state doesn't have one.
What happens if I owe tax in a state I didn't know about?
The state can assess back taxes, penalties, and interest, often going back several years. Many states offer voluntary disclosure programs that limit how far back they look and reduce penalties if you come forward before they contact you. Talk to a tax professional before reaching out to the state.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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