State Income Tax Withholding (SITW)

State Withholding vs Federal Withholding

Federal withholding refers to the portion of wages employers deduct and remit to cover the federal income tax (FIT) that an employee owes the federal government. Similar to state income tax, federal income tax withholding (FITW) is based on multiple factors, such as the employee’s filing status, income, and details provided on Form W-4. This deduction ensures taxpayers contribute toward various national programs, such as defense, healthcare, and infrastructure.

Although it serves a similar purpose, state tax withholding is based on laws unique to that individual jurisdiction. Moreover, the withheld amounts instead go toward state-level services, like education, transportation, and public safety.

Tax Withholding vs Estimated Taxes

State income tax withholding is usually automatically deducted from a worker’s paycheck by their employer.

Estimated taxes, on the other hand, are proactively paid by self-employed individuals, independent contractors, and others who don’t have a single employer to make automatic tax deductions on their behalf.

Instead, these taxpayers calculate their own personal income tax payments every quarter and remit them directly to the applicable federal and state agencies. The amount of taxes withheld is often guided by the prior calendar year's tax returns.

How Does State Tax Withholding Work?

State withholding is calculated based on several factors, but the two most significant ones are the state’s tax system and the information the employee provided on their state-based withholding form.

Some states (e.g., California, New Jersey, Kansas, Minnesota, etc.) use a graduated tax system, where tax rates increase as the taxpayer’s income level rises. These states typically establish multiple brackets, each with a specific income range and corresponding tax rate (e.g., an income range of $35,000-$60,000 is taxed at 5%; an income range of $100,000-$150,000 is taxed at 12%).

Conversely, other states (e.g., Illinois, Colorado, Iowa, North Carolina, etc.) opt to use a flat tax system, where every taxpayer pays the same rate regardless of their income level.

What are State Withholding Tax Forms?

A tax withholding form is a document employees submit when starting a new job or after a major life change (e.g., childbirth, marriage, divorce, etc.).

These forms guide employers on how much income tax withholding to deduct from an employee’s paycheck, taking into account various personal factors, such as marital status, tax exemptions, and any deductions.

Which States Have No State Income Tax?

The following nine states forgo income taxes altogether, though some (e.g., Washington) still impose taxes on alternative forms of earnings (e.g., capital gains, interest, dividends):

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

What is a Reciprocal Agreement?

One final important factor for calculating SITW is whether a state has a reciprocal agreement with another state. Reciprocal agreements are tax arrangements between two states for individuals who live in one state but work in the other. In such cases, employees typically have state tax withheld only for the state where they reside.

These agreements are especially common in regions with significant cross-border commuting, such as between New Jersey and Pennsylvania or Maryland and Virginia.

How to Calculate State Tax Withholding

Depending on the state, accurately calculating state income tax withholding can be a complex task. Generally, however, the process involves a few key steps.

1. Determine Gross Wages: Identify how much the employee earned before any other deductions or withholdings are applied.
2. Identify Filing Status: Review the employee’s state tax withholding form to identify their declared filing status (e.g., single, married, head of household, etc.).
3. Apply Exemptions, Deductions, and Allowances: Based on the state withholding form, subtract any state-allowed personal exemptions, standard deductions, or withholding allowances to determine how much of the employee’s income is subject to state income tax (i.e., their taxable income).
4. Determine the Correct Tax Rate: Confirm if the state has an applicable reciprocal agreement based on the employee’s information. If so, employers can voluntarily make a courtesy withholding (i.e., deduct state tax withholding for both states), but it isn’t legally required.
5. Apply the Correct Tax Rate: With the correct state identified, apply either the state’s flat rate or the appropriate graduated rate based on the income bracket the employee’s taxable income falls within.
6. Withhold and Remit the Amount: Withhold the calculated amount from the employee’s paycheck and remit it to the state’s designated agency. Record the state withholding on the employee’s pay stub for transparency, year-end reporting, required tax documents, etc.

How to Calculate State Income Tax Withholding in Flat Tax States

In a flat tax state, calculating the income tax withheld from a paycheck is much simpler due to the uniform rate used. For example, imagine Employee A earns $2,400 per pay period and is paid biweekly by their Illinois-based employer.

Since Employee A didn’t claim any exemptions, allowances, or deductions on their withholding form, their employer applies the state’s flat rate (4.95% in 2026) to the $2,400 in taxable income.

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Related Glossary Terms

• State Income Tax (SIT)
• Federal Income Tax Withholding (FITW)
• Federal Income Tax (FIT)