Withholding refers to the taxes you must take out of your employees’ paychecks. State income tax is levied on income by the state government and is used to pay for state programs such as education and health services. If you are required to withhold state income tax, follow your state revenue agency’s rules.
All states -- except Alaska, Nevada, Florida, New Hampshire, Texas, South Dakota, Tennessee, Wyoming and Washington -- require that employers withhold state income tax from employees’ wages.
The criteria for withholding state income tax vary by state. For example, in Georgia, upon hiring an employee, you would give her a G-4 form to complete. The employee indicates her withholding conditions on the form, including her allowances and filing status. To figure state income tax, you would use the employee’s G-4 form and the Georgia Department of Revenue withholding tax tables. In Pennsylvania, however, you would withhold at a flat 3.07 percent, as of 2012.
Reciprocity Between States
If an employee works in your state and lives in another, you would withhold state income tax according to your work state’s policies. The employee would also pay state income tax to her home state if the tax is required there. An exception applies if both states have a reciprocity agreement. With this arrangement, the employee pays income tax only to her resident state.
In this case, you may establish an account with the reciprocal state and withhold and pay state income tax for the employee according to her home state’s requirements. For example, Pennsylvania has a reciprocal agreement with Indiana, New Jersey, Ohio, Maryland, Virginia and West Virginia. If the employee lives in Pennsylvania but works in any of the other states, you would withhold only Pennsylvania tax from her wages. If you do not withhold the tax, the employee is responsible for paying it to her home state. Contact your state revenue department for clarification about whether an employee is subject to a reciprocal agreement.
Payment and Reporting
You are supposed to pay and report all state income tax withholding to your state revenue agency based on its requirements. For example, in Georgia, you would submit state income tax withholding semiweekly, monthly, quarterly or annually; employers who withhold $100,000 or more for the payday must submit payment by the next business day. You would also file returns with the Georgia Department of Revenue based on your payment frequency.
You are also required to prepare annual W-2 forms for each employee you paid wages to and withheld taxes for during the year. You would include the employee’s wages that were subjected to state income tax in Box 16 of the W-2 and his state income tax withheld in Box 17. You file the W-2 with the Social Security Administration and the state revenue agency according to their mandated time frames. You also give the employee a copy of the W-2 to file his annual returns with the Internal Revenue Service and the state revenue agency.