The Ultimate State Income Tax Guide
What is state income tax, what does it mean for employers and employees, and can you lower your tax liability? Our guide gives you the answers.
Whether you earn income through owning a business or working for an employer, paying taxes is a common pain point. Not only are taxpayers required to pay federal taxes on income, but in most states, state income tax also applies.
In this post, we’re going to take a look at state income taxes. We’ll discuss the different types of state taxes, state tax rates, and what states do not have state income taxes. We’ll also explore potential ways to lower your tax liability. Keep reading to learn more about the ins and outs of state income tax.
Table of Contents
- What Is State Income Tax?
- How State Income Tax Works
- Who Has To Pay State Income Tax: The Employers Or Employees?
- What States Have Income Tax?
- What States Do Not Have State Income Tax?
- Search For Income Tax Rates By State
- Can You Avoid Paying State Income Tax?
- How To Calculate The State & Local Income Tax Deduction
- The Bottom Line On State Income Tax
- State Income Tax FAQs
What Is State Income Tax?
State income tax is the tax paid to state governments. It is a percentage of wages earned by residents and non-residents that live and/or work in the state where taxes are being paid. These taxes are used to pay for state public services and programs.
State income taxes fund:
- Road maintenance
- Public schools and higher education
- Law enforcement agencies
- Medicaid and healthcare programs
- Public transportation
- Public assistance
Some states do not levy a state income tax. Instead, these states may have higher property or sales taxes or levy another tax.
How State Income Tax Works
State income tax is similar to federal income tax: State governments take a percentage of an individual’s wages to pay for various programs and public services.
There are three types of state income tax:
- No State Income Tax: There are a handful of states where there are no state income taxes.
- Flat-Rate Income Tax: A flat-rate income tax is a tax that is the same percentage for everyone, regardless of income earned.
- Graduated-Rate Income Tax: Also known as progressive rate taxes, graduated-rate income tax is based on the amount of earned income. In this structure, individuals earning more income pay a higher tax rate.
|States With No State Income Tax||State With Flat-Rate State Income Tax||States With Graduated-Rate State Income Tax|
Income taxes are pretty straightforward if you live and work in the same state. However, if you moved to another state during the year or live in one state and work in another, you may have to file more than one state tax return. Laws vary by state, so make sure you understand the laws in any state where you reside or work to avoid tax penalties.
In addition to federal and state income taxes, you may also be required to pay local taxes. To learn more about the specific taxes in your state, don’t forget to check out our state tax guides a little later in this post. These guides break down tax rates, local taxes, payroll taxes, and other need-to-know tax information specific to your state.
Who Has To Pay State Income Tax: The Employers Or Employees?
If you’re a small business owner, you may be wondering if you’re responsible for paying your employees’ state income taxes. The good news is that it is not your responsibility to pay your employees’ state income taxes. However, you will be responsible for withholding the correct amount of state taxes from your employees’ paychecks if you live in a state with income taxes. It will then be your responsibility to submit these withholdings and the correct tax forms to the appropriate state agency by the due date.
As an employer, you are also responsible for submitting and paying your own state income taxes with your personal tax return.
There are a number of other payroll taxes that you or your employee will be required to pay, from local taxes to federal and state unemployment taxes, Medicare, and social security taxes. Check out our guide on payroll taxes for small businesses to know what to expect when it comes to paying payroll taxes.
What States Have Income Tax?
Most states have income taxes. More specifically, 41 states plus the District of Columbia have a flat-rate or graduated-rate state income tax.
In the next section, we’ll look at the state income tax rates for 2022, including the current tax rate ranges by state. We’ve also included the lowest income limits for the lowest and the highest tax brackets.
State Income Tax Rates For 2022
|State||State Income Tax Rate||State Income Tax Rate Range|
|Alaska||No state income tax||N/A|
|Florida||No state income tax||N/A|
|Nevada||No state income tax||N/A|
|New Hampshire||5% (interest & dividends only)||N/A|
|South Dakota||No state income tax||N/A|
|Tennessee||No state income tax||N/A|
|Texas||No state income tax||N/A|
|Washington||7% (capital gains income only)||N/A|
|Wyoming||No state income tax||N/A|
What States Do Not Have State Income Tax?
Only nine states do not levy state income taxes. These states raise revenue in other ways, such as through property taxes or sales tax. The nine states that do not have state income tax are:
- New Hampshire
- South Dakota
It is worth noting that while New Hampshire doesn’t tax earned wages, it currently taxes interest and dividends. However, legislation has passed that will gradually phase out these taxes through 2027.
Washington does not have a state income tax. However, a flat rate of 7% is charged for capital gains income.
Search For Income Tax Rates By State
While this post gives general information about state income tax rates, you can use our state-specific tax guides to learn more about your state tax brackets, payroll taxes, and other taxes (such as sales tax and use tax). Check out our available guides on:
- Arizona’s state income taxes
- California’s state income taxes
- Colorado’s state income tax
- Florida’s state income tax
- Iowa’s state income tax
- Maryland’s state income tax
- Massachusetts’s state income tax
- New York’s state income tax
- Texas’s state income tax
Don’t see your state listed? Comment below to let us know which state tax guide you’d like to see added next!
Can You Avoid Paying State Income Tax?
There are ways that you can legally avoid paying state income tax. If you live in a state that does not have state income taxes, you are not required to pay.
If you live in a state that does have state income taxes, there are a few ways you can avoid getting hit with a large tax bill. First, make sure to use any state tax credits you’re qualified to receive. These credits can help significantly lower your state tax liability. To learn what tax credits are available to you, check your state’s Department of Revenue website.
You can also lower your taxable income by taking advantage of deductions when preparing your tax return. The list of deductions for small business expenses is lengthy, from operating expenses to mortgage interest to certain medical and dental costs.
As an employee, you can also change your withholdings or have additional tax funds withheld from your paychecks so that you don’t owe state government taxes at the end of the year. You can do this by filling out your state’s W-4 and submitting it to your employer.
Finding legitimate ways to lower your tax liability is completely legal. However, failing to pay taxes owed is known as tax evasion, and it is a crime. Failing to pay taxes results in high penalties, interest, and even criminal charges. If you have a valid state tax bill, make sure you pay it on time to avoid these hassles.
How To Calculate The State & Local Income Tax Deduction
If you choose to itemize your deductions on your federal income tax return, you may be able to include state and local taxes as an itemized deduction.
Per IRS guidelines, you may be eligible to deduct the following taxes:
- State, local, and foreign income taxes
- State and local real estate taxes
- State and local personal property taxes
- State and local sales taxes
If you deduct state and local income taxes, you can’t also deduct state and local general sales taxes.
In order to be deductible, the state or local tax must have been imposed on you, and you must have paid it during your tax year. The following are also deductible:
- Estimated taxes paid to state or local governments throughout the year
- Prior year state or local taxes paid throughout the year
The total combined deduction for state and local income, property, and sales taxes is limited to $10,000, or $5,000 for married individuals filing separately. This and other itemized deductions will be listed on IRS Form Schedule A and filed along with your tax return.
The Bottom Line On State Income Tax
Having a percentage of your wages taken to pay state income tax may seem like a pain, but it’s important to remember that this money is used to fund important state programs and services. Paying your state income tax is the law, and failing to do so on time can lead to hefty fines and penalties.
Don’t be caught off-guard come tax time. Merchant Maverick offers a variety of tax resources to help you through tax season and beyond. If you’re a small business owner, don’t miss out on our tax guide for small businesses. And if you’re new to filing taxes, check out our guide to filing your small business taxes. Finally, don’t forget to check out our state tax guides to learn about specific tax rates and laws in your state — and leave a comment for the state you want to see next. Good luck!