State income tax is a percentage of your earnings that your state government collects

Most states take a cut of your paycheck or business income. The amount depends on how much you earn and which state you live in. Some states take nothing — they have no income tax at all. Others take between 1 and 13 percent, depending on your income bracket.

Your employer usually withholds state income tax from each paycheck, the same way they withhold federal income tax. If you're self-employed, you pay it yourself when you file your state tax return. The money goes to your state government to fund schools, roads, courts, and other services.

State income tax is separate from federal income tax. You file both returns, usually at the same time. The federal government and your state each get their own forms and their own money.

Key Takeaways

  • Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income).
  • Most states use a tax bracket system where you pay a higher percentage on income above a certain threshold, not on all your income.
  • Your employer withholds state income tax from your paycheck based on the W-4 form you fill out when you're hired.
  • If too much or too little was withheld during the year, you settle the difference when you file your state tax return, usually between January and April.

How tax brackets work in your state

Most states that have income tax use a bracket system. You don't pay the same rate on every dollar you earn. Instead, you pay different rates on different chunks of your income.

For example, a state might tax the first $30,000 you earn at 3 percent, the next $30,000 at 5 percent, and anything above $60,000 at 7 percent. If you earn $50,000, you pay 3 percent on the first $30,000 and 5 percent on the remaining $20,000. You don't pay 5 percent on all $50,000.

Tax brackets change every year because they're adjusted for inflation. The brackets in your state this year will be different from last year's. When you file your return, you use the brackets that were in effect for that tax year.

What gets taxed and what doesn't

Your wages and salary are taxed. So is income from self-employment, rental property, and most investments. But some income is not taxed by the state, or is taxed differently.

Social Security benefits are usually not taxed by states. Disability benefits, unemployment benefits, and workers' compensation vary by state — some tax them, some don't. Interest from certain bonds, like municipal bonds issued in your state, may be exempt. Retirement account withdrawals like 401(k)s and IRAs are taxed as income in most states, but a few states exempt retirement income entirely.

Your state's tax form or website will list what counts as taxable income for that year. If you're not sure whether something you earned should be reported, the safest move is to include it and let the state tell you if it's exempt.

How withholding works and why it matters

When you start a job, you fill out a state withholding form (sometimes combined with the federal W-4). You tell your employer how many dependents you have, whether you have other income, and whether you want extra money withheld. Your employer uses this to calculate how much state tax to take from each paycheck.

The goal is to withhold roughly the right amount so that when you file your return at the end of the year, you don't owe a big payment or get a huge refund. But withholding is an estimate. If your situation changes — you get married, have a child, take a second job, or lose income — your withholding may no longer be accurate.

If too little was withheld, you'll owe money when you file. If too much was withheld, you'll get a refund. You can adjust your withholding anytime by submitting a new form to your employer.

Filing your state tax return

You file your state return using your state's tax form, usually called the state income tax return or state 1040. The deadline is typically April 15, the same as federal taxes. Some states give you a few extra days if April 15 falls on a weekend.

You'll need your W-2 forms from your employer, or a 1099 if you're self-employed. You'll also need records of any deductions or credits you're claiming. Most states let you file online through their tax agency website, or you can mail a paper return.

If you file your federal return and claim certain deductions or credits, you may need to report those same items on your state return. But state and federal rules don't always match, so read your state's instructions carefully.

Self-employment and state income tax

If you're self-employed, you pay state income tax on your net business income — what you earn after subtracting business expenses. You don't have an employer withholding tax for you, so you're responsible for paying it yourself.

Most states require self-employed people to make quarterly estimated tax payments if they expect to owe a certain amount (usually $500 or more, but this varies). You calculate what you think you'll owe for the year, divide it by four, and send payments to your state on April 15, June 15, September 15, and January 15.

When you file your annual return, you settle up. If you overpaid in quarterly payments, you get a refund. If you underpaid, you owe the difference. Keep records of what you paid so you can report it on your return.

Frequently Asked Questions

Do I have to pay state income tax if I work in one state but live in another?

Usually you pay tax to the state where you work, not where you live. But rules vary. Some states tax residents on all income, even if they earned it elsewhere. If you work in two states, you may file returns in both. Check with both states' tax agencies to understand your situation.

What happens if I don't file a state tax return?

Your state can penalize you and charge interest on any tax owed. If you're owed a refund and don't file, you simply don't get it — the state keeps the money. If you think you owe, contact your state tax agency to discuss payment options or a payment plan.

Can I deduct federal income tax from my state taxes?

Some states let you deduct federal income tax paid. Others don't. A few allow it only in certain situations. Check your state's tax form or website to see what deductions are allowed in your state.

What's the difference between a tax deduction and a tax credit?

A deduction reduces the income that gets taxed. A credit reduces the tax you owe directly. A $1,000 deduction might save you $50 to $100 in tax, depending on your bracket. A $1,000 credit saves you $1,000. Credits are usually more valuable.