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If you do business in a state that imposes a personal income tax, you can add the withholding of the state tax to your list of payroll tax responsibilities. The states that don't impose a personal income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. (New Hampshire and Tennessee impose a tax on dividend and interest income only.) Every other state does have a personal income tax and requires employers to withhold the tax from employees' wages.
Most states allow employers to use methods that are similar to those used for federal tax purposes in determining their state income tax withholding amounts. In North Dakota, employers have the option of using one of three methods (percentage of wages, percentage of federal withholding, or withholding tables, which yields the same results as the percentage of wages method), with the first and third methods being the preferred methods. Arizona and Pennsylvania (where the state withholding amount is a fixed percentage of an employee's gross wages), as well as other states, provide wage-bracket tables that you can use to compute state withholding amounts.
State exemption certificates. Most states have their own exemption certificate form that, for state withholding purposes, serves the equivalent function of the federal Form W-4.
Local taxes. In only a few states are there cities, counties, and other local governmental units that impose their own income tax. However, if you happen to do business in one of these localities, you may very well have an additional income tax withholding obligation. Apart from local income taxes, you may also find yourself paying local taxes measured by your total payroll (payroll expense taxes) or withholding local occupational fees from your employees' wages.
- Our state income tax withholding map shows general information about the requirements in each state.
- Multistate employers may have to withhold taxes for several states, depending on the employees' states of residence and the location of their workplaces.