State withholding tax is one of the payroll taxes that many employers deduct from your wages and salary (along with federal, local and other taxes). Most states require employers to withhold state income tax from employees’ wages and salaries. The amount of state income tax you owe is based on your income and other criteria. Your employer sends the income tax withheld from your pay to your state’s revenue agency. If you're self-employed, you pay your own state income taxes throughout the year (unless you live in a state that's exempt from income tax).
The income tax withheld from your pay is based on your earned income -- including wages, salaries, tips and commissions -- your marital status, and the number of dependents and exemptions you claim on your W-4 form. You complete the W-4, an IRS form, when you begin a job in order to provide your employer with information needed to calculate your payroll withholding taxes. Most states base income tax withholding on gross pay -- the total before deductions are taken or adjustments made. The income tax you pay on unearned income, such as dividends and interest, is not withheld as part of payroll taxes, but is calculated and paid when you file your annual income tax return.
The states that do not have income taxes are Alaska, Florida, Nebraska, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee have a 5 and 6 percent income tax rate, respectively, that applies only to income from dividends and interest. States' revenue laws determine who a resident is for income-tax purposes. For instance, Virginia defines a resident as someone who maintains a legal home in the state for more than 183 days of the tax year and defines a part-year resident as one who moves into or out of the state during the tax year. A nonresident, someone who didn't live in the state during the tax year but received taxable income from the state, is subject to state income tax and must file a Virginia return.
States use income-tax revenue to run the government (including the various agencies that pass laws, build and maintain roads), provide for safety and other regulations that protect the public, and assist local jurisdictions with social issues like education and human services. States that don’t have personal income tax raise revenue through other taxes, such as those on sales, property and corporate income.
Annual State Tax Return
Tax withheld from your pay satisfies part of your responsibility to pay state income taxes. States require the filing of the annual state income tax return, in which you report the taxes withheld from your pay and follow instructions for calculating the actual amount of state income tax you owe. You are paid a refund for overpaying your taxes or must pay the difference for underpaying your taxes.
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