If you work for an employer, you know you’ll have certain taxes withheld from each paycheck. These include federal taxes, which are withheld based on your form W-4 information, and Social Security and Medicare taxes. Any bonuses or commissions will also have taxes withheld. And, if you live in a state that levies an income tax – and they are the overwhelming majority – that amount is also withheld from your paycheck by your employer.
The Lucky Nine
As of 2017, only seven states do not impose a state income tax on residents' earnings:
- South Dakota
Two other states, New Hampshire and Tennessee, do not impose a state income tax on earnings, but do collect a tax on interest and dividends at a flat 5 percent rate.
Which State’s Taxes Should You Pay?
Most people work in the same state in which they live, but a significant number do not. In that case, in which state do you pay taxes? The answer is: It’s complicated. Companies doing business in more than one state may have to withhold taxes for multiple states, and some employees may have state withholding taxes deducted in more than one state. It seems simple enough that either the employee’s state of residence or the state in which she works should prove the determining factor, but state laws often conflict. The IRS' position is that, by default, state taxes are withheld in the state where the employee works or where he performs services. But much depends on the employer’s business connection, or nexus, to a state. Any sort of facility within a state creates a nexus, and so does an employee working for an employer in one state who performs services or sales in other states.
In some instances, an employer may not have a nexus to the employee’s residential state, but the two states may have a reciprocity agreement. In this case, employees are charged state taxes on where they live, not where they work. If the employer has a nexus in both states, the company may have to withhold employee state taxes for both states. Some states have their own laws about withholding when it concerns residents working in another state or non-residents working in the employer's state.
If you live in a state without income tax but work in a state that does levy such taxes, you’ll have to file taxes in the state in which you earned income. Similarly, if you work in a state with no income tax but live in a state with income tax, you’ll have to pay taxes in the state where you reside. If you are due a tax refund in a state in which you do not live, you must file a non-resident tax return. This may affect any refund you have coming from your own state. As you see, it’s complicated.
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State Tax Refunds
Just as you would receive a federal income tax refund if you overpaid your federal taxes, you should also receive a state refund when you overpay state taxes. How quickly you'll receive a state tax refund after filing your return depends on whether you filed it electronically or via snail mail. When taxes are filed through e-filing, the refunds generally come more quickly than if you’re waiting for a paper check. Check the status of your state refund by phone or on your state's website.
- IRS: Withholding Tax: The Basics Information About Federal Income Tax Withholding
- Newsday: 12 States That Have Either No Income or Sales Taxes
- Retirement Living: Taxes by State
- SSA/IRS Reporter: Multi-State Income Taxation: For Which State Must You Withhold?
- IRS: How Do I Check My State Tax Refund Status?
- IRS: 5 Misconceptions About Your State Tax Refund Status