Hidden Growth Tax: Comparing Payroll Taxes in All 50 US States

If you’re planning to grow a lot, identifying jurisdictions that tax you the least can help minimize this tax. We’ve calculated tax rates for new operations in each US state and Waterloo.

Expanding to a new community involves many things, including talent, ecosystem and location. However, no matter where you go, cost must be a prime factor in your decision.

For tech scale-ups, new funding must be stretched to achieve business goals. For multinationals, expansion funds might be readily available, but spending is still scrutinized for effectiveness. For startups, lower costs mean a longer runway to launch products and raise value.

When we discuss cost in the context of international expansion, it’s usually focused on salaries and rent, two of the biggest expenses to consider. Taxes are also a big consideration, but they’re often overlooked.

When people talk about taxes, they’re usually referring to corporate income taxes or personal income taxes, the latter of which doesn’t directly impact a company’s viability.

People often forget about payroll taxes.

Note: just to simplify, assume all dollar figures are in USD

What are payroll taxes?

Payroll taxes are all of those mandatory contributions businesses must make for each employee. This includes unemployment insurance, health/medical taxes and social security/pension contributions. This doesn’t include voluntary costs like additional health insurance or enhanced pension contributions.

Are state payroll taxes in really that different?

Yes. It would make everyone’s lives a lot easier if they were all the same. Medical contributions and social security are standardized across the United States, but every US state calculates the unemployment insurance portion of payroll taxes differently.

Generally speaking, unemployment insurance is represented as a percentage of an employee’s wage, up to a certain maximum. For example, in Missouri, unemployment insurance is calculated as 2.37% of the first $10,000 an employee earns.

In Indiana, it’s 2.5% of the first $9,500. In both cases, the total maximum amount an employer would pay is $237 per year. But, in some states you can get much bigger totals – for example, in the annual unemployment tax is $725 in Colorado and more than $1200 in Oregon!

Oh, and then when you compare it to the Waterloo region you see even more substantial differences – we don’t have state/provincial unemployment insurance, for example.

Should payroll taxes impact an expansion decision?

Yes. They aren’t the only consideration, but they’re a surprisingly important one. After all, depending on the size of operation these taxes can really add up.

For example, for a $75,000 salary in South Carolina, a company would have to pay $5,800 in payroll tax per employee. In Washington, it’s closer to $6,500 per employee. That’s a $700 difference that doesn’t sound like much, but it’s $70,000 in a 100-person operation.

In Waterloo, the per employee tax for someone earning $75,000 is about $4,250 each year. That means in Waterloo you’d be spending $225,000 USD less than Washington in payroll taxes each year for your 100-person office.

That’s not even accounting for the higher wages in Washington. In Q3 2024, the going rate for a Software Developer in Waterloo (according to ERI) was $82,515 and in Washington it was $142,940.

In that situation, a 100-person office in our community would cost $732,954 less in payroll taxes each year than the same office in Washington (and another $6M less in salary!). In California, that same 100-person office would cost $885,000 more in payroll taxes than in Waterloo.

It might not be the decision-maker, but all things being equal, it’s usually advantageous to pay less payroll tax. Avoiding them can represent a big savings and reduces the barrier to future growth.

Which US states have the lowest payroll taxes?

We’ve done the research for you! Our team has dug up the state unemployment, federal unemployment, medical and social security taxes for all 50 states. This data comes directly from each state via onpay.com.

The graph below illustrates the projected total payroll tax charge for a 100-person office at an average salary of $75,000 per year. The raw percentages are included in a table below.

Oh, and we’ve included Waterloo, Canada as a comparison. Many people think of Canada as a high-tax jurisdiction, but it’s simply not the case for businesses.

The raw data

There’s a lot of numbers here, but we wanted you to be able to check our numbers and make your own calculations.

The “wage base” is the maximum earnings for calculating unemployment insurance contributions, and it’s different for every state.

The actual rate is also different in every state. However, the federal rate is the exact same across the board. Assuming you pay your state unemployment insurance, the federal rate is 0.6% and is only charged on the first $7,000, which means the maximum annual payment is $42.

It pays to grow in Canada

When expanding your business, the contrasting payroll tax environments between Canada and the US are important financial factors to consider. Lower payroll tax obligations make Canada an appealing destination for business growth and development.