What is the state tax deduction?

State tax deductions refer to deductions that employers make from employee wages for state income taxes. Each state has its own  tax rates  and procedures. This  is similar to the federal income tax deduction (FITW)  , but the amount you pay depends on each state's unique tax structure. Your employees' income (wages, tips, commissions, etc.) may be subject to the following:

• Flat income tax:  Some states have a single-rate, flat tax that applies to all employees, regardless of their income.
• Graduated rate income tax:  Most states levy graduated rate income tax, which increases progressively as employees enter higher income tax slabs.

Some states are income tax-free, meaning employers don’t have to deduct state taxes when paying wages (   exceptions may apply for remote workers ).

State Taxes vs. Local Taxes

Some towns, cities and counties impose a local income tax levy or municipal tax to fund community programs.  Like state taxes, the amount withheld varies by location. Knowing whether your employees' income is subject to local income taxes   is an additional part of  the payroll process .

State Withholding Forms

 Every American worker has to fill out  a federal W-4 form from the IRS when they start a new job. But in areas with income taxes, they typically   also have to fill out a separate state withholding form , or state W-4.

For example, NYS employees  must fill out Form IT-2104  and California   uses Form DE 4. Giving employers important information about their tax responsibilities at the state level, these forms provide information about the employee:

• Filing status (e.g. single/head of household, married)
• Withholding allowances
• Discount

How to calculate state tax deduction from your salary

How much money employees pay in state taxes depends on how much they earn, their income tax rate, and other factors. Here's a general overview of how state tax deductions are calculated:

1. Calculate the employee's gross pay for the current pay period.
2. Deduct voluntary pre-tax contributions (e.g., 401(k), health insurance).
3. Using your state's tax guide, subtract the appropriate percentage from the new adjusted total amount.

With a few exceptions, state tax filing deadlines generally coincide with federal due dates.  Refer to state government rules for the most up-to-date information  .

Example: How to Calculate California State Tax Deduction

California is a state with a gradated income tax rate, so you need to take into account the employee's tax bracket. In this state, there are two ways to calculate withholding for personal income tax:

Method A: Salary bracket table

The wage bracket table method, designed for employees earning less than $1 million,   lets you identify the appropriate tax deduction amount based on the employee's filing status, number of deduction allowances (if applicable), and pay period:

• Step 1:  Find your employee's gross pay and compare it to California's low income exemption table.

If they are less than or equal to the amounts in the table, state income taxes do not need to be withheld. If they are not required, proceed to Step 2.

• Step 2:  Subtract any additional withholding allowances for deductions from the employee's gross pay using the amounts shown in the estimated deductions table.
• Step 3:  Subtract the number of additional withheld allowances from the total allowances to get the net allowances of the employee.
• Step 4:  Find the state tax withholding on the appropriate state wage bracket table.

Method B: Exact calculation

The exact  calculation method  takes into account the payroll period, filing status, number of allowances withheld, standard deduction, and exempt allowance credit. Using this method, you can calculate state tax withholding for your employees manually or by computer:

• Step 1:  Repeat step 1 from method A.
• Step 2:  Check if additional deduction allowances for estimated deductions are shown on the employee's DE 4 form, and deduct the amount shown in the estimated deduction table from their gross salary.
• Step 3:  Subtract the standard deduction amount shown in the standard deduction table to obtain the employee's taxable income.
• Step 4:  Using the employee's pay period and marital status as guides, find the applicable row on the tax rate table for their taxable income and calculate tax liability as specified.
• Step 5:  Subtract the tax credits shown in the exemption allowance table from the tax liability to know the amount of tax you should deduct from their salary.

Which states do not have state income tax?

Employers and employees in some areas do not have to worry about this levy.  As of 2023  , the list of states without a state income tax includes:

• Alaska
• Florida
• Nevada
• new Hampshire*
• South Dakota
• Tennessee
• Texas
• Washington*
• Wyoming

*Washington and New Hampshire do not have a traditional state tax deduction, but other income taxes apply. Washington taxes capital gains for certain high earners, and New Hampshire taxes dividend and interest income.

State Income Tax Rules for Remote Employees

By 2023, it looks like  remote work is here to stay. That means more employers will have to figure out how to handle increasingly complex state payroll taxes for their employees.   Depending on  where your remote workers live , this can happen in several ways:

• Employees live and work in the same state as the company:  If your remote workforce lives in your state, you’ll likely only need to pay your state’s income taxes (if any).
• Employees live and work in a different state than the company:  In this scenario, you’ll likely have to pay taxes to the employee’s state.
• Employees live in the same state as the company, but work in another state:  In this case, you'll likely pay taxes to your company's home state.

In addition, state-specific tax rules can affect payroll. For example, a handful of states  follow the employer rule of convenience  , which allows them to tax nonresident employees based on the company's location. States with a rule of convenience that is an official policy include:

• Connecticut
• Delaware
• Nebraska
• New York
• new Jersey
• Oregon
• Pennsylvania

Other factors to consider  include state reciprocity and  the reverse tax credit  . Many neighboring states share reciprocity agreements, which exempt nonresidents from withholding. The reverse tax credit system requires taxpayers to file in both states, but it helps avoid double taxation.