How to Withhold State Income Tax from Employee Pay

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Unless your business location is in a state which has no state income tax, you have a responsibility as an employer to deduct income taxes from employees who work in your state and to submit these taxes to your state department of revenue. The states with no state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. 

These responsibilities are the same as employer responsibilities for payroll taxes, including federal income taxes.

Key Takeaways

  • Most states require employers to withhold state income taxes from their employees' paychecks.
  • To submit these taxes, you will need to obtain copies of the state withholding tables and calculate state withholding deductions for each employee who has wages subject to withholding.
  • Deduct the calculated amount for each of your employees.
  • Submit the withheld taxes to your state revenue authority and don't forget to file the necessary reports.

Overview of the State Income Tax Process

If you have employees working in a state which requires state income tax, there is a process you must follow.

  1. First, obtain a federal Employer ID Number (EIN), if you haven't already done so. The EIN is similar to a Social Security number for a business. It is required for any business with employees and most other businesses. 
  2. Obtain a state employer tax permit, which in some states is the equivalent of a state EIN. 
  3. Learn what wages are subject to state income tax withholding (these wages may be different from federal regulations). The information should be on the website of your state's revenue department. 
  4. Learn about any reciprocal agreements between states for income tax withholding and payment for workers who live in one state and work in another.
  5. Obtain copies of the state withholding tables and calculate state withholding deductions from employee paychecks. 
  6. Learn about your state's regulations for filing (submitting) income tax withholding.
  7. Deposit withholding amounts deducted from employees (most states use electronic filing for these deductions).
  8. File reports (annual or quarterly) on amounts withheld and amounts owed and paid (similar to IRS Form 941).

As you can see, the process for calculating, deducting, paying, and reporting these taxes is similar to the process for federal income tax withholding.

State Tax Agencies

To find out about state income taxes, sales taxes, and other state taxes, go to your state's department of revenue and look for the business tax division.


The IRS provides a complete list of websites for each state if you need help finding the right page for your state.

Withholding State Income Taxes from Employee Paychecks

After you have gathered the information about state income taxes, you will need to include these taxes in your company's payroll process. 

The process begins with your calculation of gross pay for each employee. 

From that amount, you will need to calculate the specific amount to be withheld for that employee for state income taxes. Remember that each withholding amount (including state income taxes, federal income taxes, and FICA taxes) is calculated against the gross pay amount. 

After all taxes and other withholding, you will end up with a net pay amount. 

Then, the withholding amounts for each employee and the total for each kind of withholding must be placed in a separate liability account, to be paid as required by your state. 

Frequently Asked Questions (FAQs)

How do I withhold tax for employees that live in another state?

If your out-of-state employee lives in a state with a reciprocal tax agreement with your state, you can withhold their taxes for that state. There are 16 states with reciprocal tax agreements. If your employee's home state does not have this kind of tax agreement, you should still withhold taxes for the work state. You also could do a courtesy withholding of taxes for their home state, but it's not required.

When should I submit the state taxes for my employees?

States have their own rules for when taxes are due. You may be required to submit biweekly, monthly, quarterly, or annually. Check with your state's department of revenue to find out when you need to deposit taxes and avoid penalties or late payment fees.


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  1. IRS. "State Government Websites."

  2. Virginia Tax. "Withholding Tax."

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