As an employer, withholding taxes from employee wages is all part of the job. In addition to federal income tax withholding, you may also need to handle state income tax withholding. Unlike federal income tax, state income tax rules and rates vary by state. So, what is state income tax?
What is state income tax?
State income tax (SIT) is a type of state-mandated tax applied to a worker’s wages. Employers are responsible for deducting SIT from an employee’s gross wages and remitting it to the appropriate state tax agency.
SIT rates vary and can be either flat or progressive. States with flat rate tax structures tax each employee at the same rate (i.e., a standard percentage). Progressive tax structures use wage brackets to tax employees at different rates. These rates are based on the employee’s earnings.
Before employees begin working at a business, they must fill out their state W-4 form. Like the federal Form W-4, state W-4s gather information about an employee so you can begin withholding state income tax from their wages.
Many states allow employees to claim withholding exemptions on the state W-4 to lower their state income tax withholding.
Most states have their own version of the W-4 form for income tax withholding at the state level. Four states—Colorado, New Mexico, North Dakota, and Utah—require that employees use the federal Form W-4 for SIT withholding.
Once you collect a completed form from your new hire, you can begin running payroll and withholding state income tax from their wages.
States use income taxes to fund various state projects and programs, such as education, health care, corrections, and public assistance.
State income tax by state
Depending on your business location, you might not be responsible for handling state income tax for your employees. Why? Not all states have SIT.
Take a look at the list of states with and without state income tax.
What states have state income tax?
Currently, forty-one states and Washington D.C. have state income taxes on wages earned from employment.
Here is a list of the states with SIT:
| Alabama | Kentucky | North Carolina |
| Arizona | Louisiana | North Dakota |
| Arkansas | Maine | Ohio |
| California | Maryland | Oklahoma |
| Colorado | Massachusetts | Oregon |
| Connecticut | Michigan | Pennsylvania |
| Delaware | Minnesota | Rhode Island |
| Georgia | Mississippi | South Carolina |
| Hawaii | Missouri | Utah |
| Idaho | Montana | Vermont |
| Illinois | Nebraska | Virginia |
| Indiana | New Jersey | Washington D.C. |
| Iowa | New Mexico | West Virginia |
| Kansas | New York | Wisconsin |
What states do not have state income tax?
Currently, there are nine states that do not have state income tax on employment income. Let’s take a look at the states without income tax on employee wages:
| Alaska | New Hampshire | Texas |
| Florida | South Dakota | Washington |
| Nevada | Tennessee | Wyoming |
New Hampshire and Tennessee do have income tax on unearned income, such as dividend and interest income. However, they do not apply the income tax to employment income.
State income tax map
Use the map below for a visual of which states have income tax on employment income. And, check out the second map to determine which states use a flat rate or progressive structure for state income taxes.
Check the income tax regulations for your state. Each state has its own income tax rules and rates.
Reciprocal agreements
There’s another thing you should keep on your radar: tax reciprocity between states.
State tax reciprocity agreements allow an employee who lives in one state and works in another to request exemption from state income tax withholding for the state they work in. Instead, the employer would withhold and remit taxes to the employee’s home state.
States with tax reciprocity are generally neighboring states. But, not all states have state tax reciprocity agreements.
| Want to find out if your state has a reciprocal agreement with anyone? Check out our article, “What Is Tax Reciprocity?” for more information! |
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This article has been updated from its original publication date of 1/28/2015.
This is not intended as legal advice; for more information, please click here.