State Income Tax Withholding for Employers

Most states with an income tax require employers to withhold it from wages, much as the federal system does. The state sets the rates, the withholding forms, the deposit schedule and the penalties, so a business that hires in a new state starts again from the beginning. This page covers how state withholding generally works, then looks at Illinois, Indiana and a few other states to show how the details differ.

Which states withhold

Most states tax wages and require withholding. States that do not tax wage income include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Washington, for example, has other employer obligations, such as paid leave premiums, covered in our state paid family and medical leave guide. Employers in no-wage-tax states usually still handle unemployment insurance and other state payroll programs.

Typical steps

1. Register with the state tax agency, often through an online portal.
2. Collect the state's version of the Form W-4, or accept the federal form if the state allows it.
3. Withhold using the state's tables or percentage formula.
4. Deposit on the schedule the state assigns, which may depend on how much you withhold.
5. File a periodic return and an annual reconciliation, and send W-2 copies to the state.

Illinois: a closer look

Illinois requires an employer to withhold if it is required to withhold federal income tax on employee pay for work done in Illinois. For payroll, the Department of Revenue says 4.95% of net income is the rate used for withholding, with the amount based on the allowances the employee claims. As a withholding agent, you are liable for the tax even if you failed to withhold it from the employee, because Illinois law treats the amounts required to be withheld as a tax on you.

Reporting and payment details for 2026:

• File Form IL-941 each quarter, electronically. Illinois also requires W-2 and W-2c forms to be filed electronically.
• New employers are automatically placed on the monthly payment schedule and the quarterly filing schedule. Monthly payers pay by the 15th of the following month.
• Semiweekly payers pay by Wednesday for amounts withheld on the previous Wednesday through Friday, and by Friday for amounts withheld Saturday through Tuesday.
• A monthly payer moves to the semiweekly schedule if it reported more than $12,000 in withholding in the lookback period (the year ending June 30 of the previous calendar year) or exceeds $12,000 in a quarter.

For other Illinois topics, visit our Illinois page.

Reciprocity agreements

A few states have reciprocal agreements, so an employee who lives in one state and works in the other pays income tax only to the home state. Illinois has these agreements with Iowa, Kentucky, Michigan and Wisconsin. An employee who lives in one of those states and works in Illinois can claim the exemption by giving the employer a completed Form IL-W-5-NR, which the employer must keep on file. The employee must tell the employer within ten days if they change their state of residence. The same form covers certain military spouses.

Reciprocity is not universal. Delaware, for example, says on its withholding FAQ that it has no reciprocity with any state. Neighboring states may withhold for both, and the employee then claims a credit for tax paid to the other state. Always check the specific pair of states involved.

Indiana: county tax and a short-stay rule

Indiana adds a county income tax on top of state tax. Indiana's Departmental Notice #1 explains that the county of residence is determined on January 1 of the tax year. If the employee lives outside Indiana on January 1 but works in an Indiana county, withholding uses the rate for the county of principal place of work or business. For withholding on or after January 1, 2024, an employer does not have to withhold state or county tax on some nonresident employees expected to work in Indiana 30 days or less in the taxable year, subject to the notice's rules. The state rate for individuals in 2026 is 2.95%.

Out-of-state employers and remote workers

Rules for remote employees depend on the state. New York, for example, says an out-of-state employer that is not incorporated or licensed in New York and does not maintain an office or transact business there is not required to withhold New York State, City or Yonkers taxes on employees who live in New York, though it may withhold for the employee's convenience, and doing so triggers New York's withholding rules. Other states have different tests. See multi-state payroll.

Common mistakes

• Starting a remote employee in a new state without registering.
• Withholding only for the work state when the home state also taxes.
• Using last year's withholding formula after a rate change.
• Forgetting state forms for nonresident or reciprocity claims.
• Missing quarterly returns when no tax was withheld.

How we can help

We register employers for state withholding, set up payroll for the correct state and local tax, and help with state notices. See payroll services, multi-state and local tax, and state tax notices and representation.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.