Which order is correct when setting up company taxes?

• A. Local, State, Federal
• B. Federal, Local, State
• C. Federal, State, Local
• D. State, Local, Federal

Answer: (C)

In payroll tax setup, you configure taxes in a cascading order so each level builds on the previous one. Federal taxes establish the nationwide framework for withholding (like federal income tax, Social Security, and Medicare). State taxes then apply the rules for the employee’s state of residence or work, which can vary widely from state to state. Local taxes are applied last and depend on the locality (city, county) and often reference the state context as a basis. This sequence ensures accurate calculations and proper compliance for all withholdings.

For example, when processing payroll for an employee in a city with local taxes, you first set up federal rules, then state rules, and finally local rules. Starting with local or state before federal can lead to missing or misapplied withholdings because the higher-level (federal) framework isn’t established yet, and some local rules may rely on correct federal or state data. Therefore, the correct order is Federal, then State, then Local.