Tax withholding may not be the most glamorous part of being a business owner. But if you have employees, it’s 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?
Read on to learn what is state income tax, which states do and do not have it, state income tax rates, and more.
What is state income tax?
State income tax (SIT) is a state-mandated tax that applies to employee wages. Employers must deduct SIT from employees’ gross wages and remit it to the appropriate state tax agency.
|Are you a new employer? If you haven’t already, be sure to register with your state’s Department of Revenue for a withholding tax account number for state income taxes. That way, you can remit withheld state income taxes. Use our New Employer Information by State page for more information.|
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 graduated wage brackets to tax employees at different rates, depending 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. Although the new federal W-4 eliminated withholding allowances, many state W-4 forms continue using them.
Most states have their own version of the W-4 form for income tax withholding at the state level. But, some states require that employees use a separate 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.
Keep in mind that not all states have a state income tax. So depending on your business and employees’ locations, you may not be responsible for handling state income tax for your employees.
What are the states with 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:
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- Washington D.C.
- West Virginia
What are the states with no 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 state income tax on employee wages:
- New Hampshire
- South Dakota
New Hampshire and Tennessee do have income tax on unearned income, such as dividend and interest income. However, they do not apply income tax to employment income.
State income tax by state: 2023 Structures
Again, each state has its own income tax rules, structure, and rates.
Changes on the horizon: Currently, several states (e.g., Arizona) adopted legislation to change their tax structure from a progressive to a flat tax rate. A flat tax rate is generally easier for employers to use and easier for employees to forecast their tax liability.
Take a look at the following tax structures by state for 2023.
|Alaska||Alaska does not have a state income tax.|
|Florida||Florida does not have a state income tax.|
|Georgia||Progressive (flat tax rate beginning in 2024)|
|Nevada||Nevada does not have a state income tax.|
|New Hampshire||New Hampshire does not apply state income tax to employee wages.|
|South Dakota||South Dakota does not have a state income tax.|
|Tennessee||Tennessee does not apply state income tax to employee wages.|
|Washington||Washington does not have a state income tax.|
|Wyoming||Wyoming does not have a state income tax.|
Keep in mind that there are also some state income tax exemptions by state for individuals with earnings below a certain amount.
How do reciprocal agreements impact state income tax?
Are you familiar with state income tax reciprocity? According to one survey, 42% of Americans are unsure whether their state has reciprocity with another state.
State tax reciprocity agreements allow an employee who lives in one state and works in another to request an exemption from state income tax withholding for the state where they work. Instead, you 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.
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This article has been updated from its original publication date of January 28, 2015.This is not intended as legal advice; for more information, please click here.