State Tax (US)
US state-level income tax imposed on employee wages that varies by state, ranging from 0% in nine states with no income tax to 13.3% in California, and is withheld from paychecks alongside federal tax.
What Is State Tax?
Key Takeaways
- ✓State income tax is an additional income tax imposed by individual states on wages earned within their jurisdiction, withheld from paychecks by employers alongside federal tax.
- ✓Nine US states impose no state income tax, while the remaining 41 states (plus DC) tax income at rates ranging from 1% to 13.3%.
- ✓State income tax collectively generates $1.1 trillion in annual revenue, funding education, infrastructure, public safety, and state-level programs (Census Bureau, 2023).
- ✓The 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes (SALT) at $10,000, reducing the federal tax benefit of living in high-tax states.
- ✓Remote work has created unprecedented state tax complexity, as employees may owe tax in states where they physically work, not where their employer is headquartered.
State income tax is the second layer of income tax on American paychecks. After the federal government takes its share, most states take another cut. How much depends entirely on where you work. In Texas or Florida, the state takes nothing. In California, high earners lose an additional 13.3% to the state. This geographic variation in tax burden has real consequences. It influences where companies locate, where employees choose to live, and how much of a raise actually translates to higher take-home pay. An employee earning $100,000 in New York City pays roughly $6,000 more in combined state and local income tax than the same employee earning $100,000 in Dallas. For HR teams, state tax creates administrative complexity. Every state where you have employees is another tax jurisdiction with its own rates, brackets, forms, filing deadlines, and registration requirements. And with the rise of remote work since 2020, companies that used to operate in one or two states suddenly have employees scattered across dozens.
States With No Income Tax
Nine states impose zero income tax on wages. Understanding how they fund government operations helps explain why some are considering adding income taxes while others are eliminating them.
| State | Income Tax Status | Primary Revenue Source | Notes |
|---|---|---|---|
| Alaska | No income tax | Oil revenue (Permanent Fund) | Only state that pays residents an annual dividend ($1,312 in 2023) |
| Florida | No income tax | Sales tax (6%) + tourism taxes | One of the fastest-growing states for corporate relocations |
| Nevada | No income tax | Gaming and entertainment taxes | Also no corporate income tax |
| New Hampshire | No wage income tax | Property taxes + interest/dividend tax (being phased out) | Taxes interest and dividends but phasing this out by 2025 |
| South Dakota | No income tax | Sales tax (4.5%) | Also no corporate income tax |
| Tennessee | No income tax | Sales tax (7%, highest in the US) | Fully eliminated income tax on interest/dividends in 2021 |
| Texas | No income tax | Sales tax (6.25%) + property taxes | Property tax rates are among the highest in the US as a result |
| Washington | No income tax | Sales tax (6.5%) + B&O tax on businesses | New 7% capital gains tax on gains above $250,000 (effective 2022) |
| Wyoming | No income tax | Mineral extraction taxes | Smallest population of any no-income-tax state |
Flat Tax vs Progressive Tax States
States that do impose income tax use one of two structures: a flat rate that applies equally to all income levels, or progressive brackets that increase with income.
Flat tax states (2024)
Thirteen states use a single flat rate: Arizona (2.5%), Colorado (4.4%), Georgia (5.49%), Idaho (5.8%), Illinois (4.95%), Indiana (3.05%), Iowa (3.8%), Kentucky (4.0%), Michigan (4.25%), Mississippi (4.7%), North Carolina (4.5%), Pennsylvania (3.07%), and Utah (4.65%). Flat taxes are simpler to administer and withhold because the rate doesn't change based on income. Several states have recently moved from progressive to flat: Arizona, Georgia, Iowa, and Mississippi all transitioned between 2022 and 2024.
Progressive tax states
States like California, New York, New Jersey, Oregon, and Minnesota use progressive brackets similar to the federal system. California's brackets range from 1% to 13.3% across 10 brackets. New York's range from 4% to 10.9% across 9 brackets. Progressive systems collect more from high earners and less from low earners, but they're harder to administer because withholding must estimate the employee's annual income to apply the correct bracket.
The trend toward flat taxes
Since 2021, at least 8 states have either adopted flat rates or reduced their bracket count. The argument for flat taxes: simplicity, predictability, and competitiveness with no-income-tax states. The argument for progressive taxes: fairness (higher earners pay proportionally more) and higher revenue capacity. HR teams should monitor state tax changes annually, as rates and structures are shifting faster than at any point in the past 30 years.
Highest and Lowest State Tax Rates
The gap between the highest and lowest taxing states has significant implications for employee take-home pay and employer competitiveness.
| Rank | Highest-Tax States (Top Marginal Rate) | Lowest-Tax States (Flat Rate or Lowest Bracket) |
|---|---|---|
| 1 | California: 13.3% | North Dakota: 1.95% |
| 2 | Hawaii: 11.0% | Arizona: 2.5% |
| 3 | New York: 10.9% | Indiana: 3.05% |
| 4 | New Jersey: 10.75% | Pennsylvania: 3.07% |
| 5 | Oregon: 9.9% | Iowa: 3.8% (new flat rate) |
| 6 | Minnesota: 9.85% | Kentucky: 4.0% |
| 7 | Vermont: 8.75% | Colorado: 4.4% |
| 8 | Wisconsin: 7.65% | Michigan: 4.25% |
State Tax and Remote Work
The remote work revolution has made state income tax compliance the most complex it's ever been. Here's what employers need to know.
The general rule
Employees owe state income tax in the state where they physically perform work. An employee living in Georgia but working remotely for a California employer generally owes Georgia income tax, not California. The employer must register with Georgia's Department of Revenue, set up Georgia withholding, and file Georgia employer returns. This applies even if the employee is the only worker in that state.
Convenience of the employer rules
A few states, most notably New York, have "convenience of the employer" rules that tax remote workers as if they were working in the state, unless the remote arrangement is necessary for the employer (not just convenient for the employee). Under New York's rule, a New York-based company with a remote employee in Connecticut may need to withhold New York taxes from that employee's pay even though the employee never sets foot in New York. The employee then claims a credit on their Connecticut return to avoid double taxation, though the credit may not fully offset the New York liability.
Reciprocal agreements
Some neighboring states have reciprocal agreements where employees who live in one state and work in another only owe tax in their home state. For example, Pennsylvania and New Jersey have a reciprocal agreement. An employee living in New Jersey but commuting to Philadelphia only pays New Jersey income tax. The employer withholds NJ tax instead of PA tax. There are about 30 reciprocal agreements between various state pairs. HR teams must track which pairs have agreements and apply them correctly to avoid double withholding.
Nexus and employer registration
Having even one employee in a state can create nexus, meaning the employer now has a tax presence in that state. This may trigger corporate income tax obligations, sales tax collection requirements, and employer registration for unemployment insurance. Before allowing employees to work remotely from new states, companies should evaluate the full compliance cost, not just the income tax withholding. Some companies have implemented policies restricting remote work to states where they're already registered to avoid creating new nexus.
Employer State Tax Compliance Checklist
Every state where you have employees requires a distinct set of compliance actions. Here are the universal requirements.
- Register with the state's department of revenue or taxation. Obtain a state employer identification number (separate from the federal EIN).
- Register with the state's unemployment insurance agency and obtain a SUTA account number.
- Set up state income tax withholding in your payroll system using the correct rates, brackets, and allowances for each state.
- Collect state-specific withholding certificates from employees (many states have their own form rather than accepting the federal W-4).
- Deposit state taxes on the schedule required by that state (varies from monthly to quarterly depending on the state and the employer's liability).
- File quarterly or annual state withholding returns by the state's deadline.
- Issue state W-2 copies to employees and file with the state by the required date (often January 31 or February 28).
- Monitor rate changes: most states adjust brackets and/or rates annually. Payroll software providers push these updates automatically, but verify them.
- Track reciprocal agreements if employees live in one state and work in another.
The SALT Deduction Cap and Its Impact
The State and Local Tax (SALT) deduction is one of the most debated tax provisions in recent years, and it directly affects employees in high-tax states.
What is the SALT deduction?
The SALT deduction allows taxpayers who itemize on their federal return to deduct state and local income taxes (or sales taxes) plus property taxes from their federal taxable income. Before 2018, this deduction was unlimited. A taxpayer in New York paying $25,000 in state income tax and $15,000 in property tax could deduct the full $40,000 from their federal taxable income.
The $10,000 cap
The 2017 Tax Cuts and Jobs Act capped the SALT deduction at $10,000 ($5,000 for married filing separately). This change hit employees in high-tax states hard. The same New York taxpayer who was deducting $40,000 can now only deduct $10,000, increasing their federal taxable income by $30,000. At a 24% federal bracket, that's $7,200 more in federal tax per year. The cap is scheduled to expire after 2025 unless extended by Congress.
State workarounds
Several states have enacted pass-through entity (PTE) tax elections that allow S corporations and partnerships to pay state tax at the entity level, effectively working around the $10,000 cap for business owners. Over 30 states now offer some form of PTE election. This doesn't help W-2 employees, but it's relevant for HR teams at pass-through businesses, as it affects how owner compensation and distributions are structured.
State Tax Revenue and Impact Metrics
These numbers show the scale and variation of state income tax across the United States.
Frequently Asked Questions
Which state's tax do I pay if I live in one state and work in another?
Do I pay state tax on remote work income?
Can state tax rates change mid-year?
How does state tax affect my total tax burden?
What happens if my employer doesn't withhold state tax?
Are there states considering adding or removing income tax?
Written by Adithyan RK