(UNITED STATES) — Paying Federal taxes, State taxes, and Local taxes in the U.S. is not automatic for everyone; what you owe usually depends on your residence, where you work, and where your income is sourced. These details matter for immigrants, employees, remote workers, and business owners.
The three tax layers (what they are, and who sets them)
Federal taxes (nationwide)
Federal taxes apply across the country and are administered by the Internal Revenue Service (IRS). In many cases, anyone with U.S.-sourced income will face some federal tax responsibility, including:
- Salaried employees (income tax withholding plus payroll taxes like Social Security and Medicare)
- Self-employed individuals (income tax plus self‑employment tax)
- Business owners
- Corporations (corporate income tax)
- Partnerships and LLCs (often pass-through reporting where owners report business income on their own returns)
State taxes (varies by state)
Each state sets its own rules—there is no uniform system. Some states collect state income tax from residents and from nonresidents with income sourced to the state. Other states do not impose a broad personal state income tax, but may rely more on sales, property, or business taxes.
A key example group is the “no broad personal income tax” states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming. New Hampshire and Tennessee tax only certain unearned income. People in those places still commonly owe federal taxes.
Local taxes (city or county)
Localities may add taxes on top of federal and state systems. These are location-specific and can apply if you live or work inside the city or county that imposes them.
- Examples: New York City income tax, San Francisco payroll tax, Ohio city income taxes
⚠️ Not all individuals pay all three taxes; residency and income source determine liability. Remote workers may owe state/local taxes even if employed by a company in another state.
Compare tax obligations by scenario and jurisdiction
Table 1: Compare tax obligations by scenario and jurisdiction
| Scenario | Federal Tax | State Tax (No Income Tax State example) | State Tax (Income Tax State example) | Local Tax (City/County) |
|---|---|---|---|---|
| Salaried employee living and working in Texas | Typically yes | Texas: no state income tax (other state taxes may still apply) | N/A | Depends on locality; often none |
| Salaried employee living and working in California | Typically yes | N/A | California: state income tax can apply | Some local business/payroll taxes may apply in certain cities |
| Salaried employee living and working in New York City | Typically yes | N/A | New York: state income tax can apply | New York City income tax can apply |
| Remote worker employed by a Texas company, living in New York | Typically yes | Texas: no state income tax (employment location alone may not control) | New York: state income tax may apply based on residence and sourcing rules | Local taxes may apply depending on the city/county rules |
How the layers hit common employee scenarios
Texas vs California vs New York City illustrates the “not universal” rule quickly.
- A salaried employee in Texas typically still pays federal taxes, yet no broad Texas state income tax applies.
- A salaried employee in California may owe federal taxes and California state income tax.
- A salaried employee in New York City can face all three layers: federal taxes, New York state income tax, plus New York City income tax.
Remote work complicates “where you owe” questions. Picture a remote worker paid by a Texas company who lives in New York. Employer location does not always decide tax liability. Many states focus on residence and income sourcing, meaning the worker may owe New York state income tax, and possibly local taxes depending on the locality.
Map out three factors: where you live, where the work is performed, and where the income is sourced. Use these to determine which federal, state, or local taxes may apply before filing.
Immigration planning adds another wrinkle. Tax residency concepts can differ from immigration residency concepts. A person may be treated one way for immigration status and another way for taxes. That mismatch can affect planning and paperwork timing, so many immigrants choose to confirm their situation with qualified professionals.
Self-employed individuals and business owners: one person, multiple tax layers
Self-employment often creates federal obligations that resemble two taxes in one. At the federal level, a self-employed person commonly faces:
- Federal income tax (based on taxable income)
- Self-employment tax (Social Security + Medicare components)
State taxes depend on the same core triggers: residence and income source. For example, a self-employed consultant living in Florida might not pay a broad Florida state income tax, but could still owe federal taxes and might face state-level business rules such as sales tax collection (if selling taxable goods) or other state business taxes.
Local taxes can show up through licensing or city-specific business rules. Some localities impose business license taxes or earnings-style taxes. Examples include San Francisco payroll tax for certain business activity within the city, and Ohio city income taxes that may apply based on where work is performed.
✅ Check your residence, work location, and income source to determine applicable state and local taxes; consult state tax guidance for precise rules.
Business entities (LLCs, partnerships, corporations) and the “nexus” idea
Entity type changes how income is reported, but not whether states can tax you.
- C-corporations may owe federal corporate income tax. They may also owe state corporate taxes where they operate, plus local business taxes where applicable.
- LLCs and partnerships often report income through to owners at the federal level (pass-through reporting), but state and local rules can add separate layers.
California is a common example of an extra state-level layer for LLCs. A California LLC must pay an annual minimum franchise tax, even with no income. That surprises many first-time owners, especially those used to “no income means no tax.”
Remember SALT: state and local taxes may be deductible only up to $10,000. If you live in a high-tax area, plan ahead to avoid surprise federal tax impact.
Nexus is the practical test for business reach. “Business nexus” means a sufficient connection—physical or economic—to a state or locality that allows it to impose certain taxes or filing duties. A company can create nexus by:
- Operating in the state
- Employing people in the state
- Earning income in the state
Remote hiring or selling into certain markets can trigger nexus even if the owner lives elsewhere.
A federal deduction that can change the after-tax cost: SALT
Many taxpayers itemize deductions and look at SALT, which stands for state and local taxes. In many cases, state income tax and certain local taxes count toward that figure, which can reduce federal taxable income.
✅ Note on SALT deduction: state and local taxes are often deductible federally, capped at $10,000 through 2025.
That cap matters most for people in higher-tax states or cities—think California, New York, New Jersey, New York City, or a locality with its own layer—because it can limit how much state and local tax reduces the federal bill. For IRS basics, start at irs.gov.
At a glance: scenarios and who taxes what
Table 2: Summary of scenarios from the content
| Scenario | Federal | State Tax | Local Tax |
|---|---|---|---|
| Employee in Texas | Yes | No state income tax | Often none, depends on locality |
| Employee in California | Yes | Yes | Usually no for wage income, but locality rules vary |
| Employee in New York City | Yes | Yes | Yes |
| Remote worker (TX company, NY resident) | Yes | Yes (NY) | If applicable |
Federal taxes are the most consistent layer. State taxes hinge on the state’s system and on residence or income source. Local taxes are the most targeted, tied to specific cities and counties.
Practical checklist before filing or expanding a business
- Write down where you live.
- Write down where the work is performed.
- Write down where the income is sourced.
Those three details usually decide which tax layers apply.
Tax residency and immigration residency can diverge. A mismatch may affect timing and paperwork—consult a qualified professional to align your immigration status with tax obligations.
This article provides general information and is not legal or tax advice.
Individual circumstances can vary; consult qualified professionals for personalized guidance.
This guide explains the three-layered U.S. tax system: federal, state, and local. It highlights how residency and income sources determine liability, noting that some states have no income tax while others have complex local requirements. It also covers the tax implications for remote workers, self-employed individuals, and business entities, including the ‘nexus’ concept and the federal SALT deduction cap.
