State income tax is a tax imposed by individual U.S. states on income earned within their borders. Not all states have it, and rates and rules vary widely.
What is State Income Tax?
State income tax is charged by certain U.S. states on income earned within their borders. Unlike federal income tax, which applies to everyone across the U.S., each state decides whether to have its own income tax and, if so, how to calculate it.
There are eight states with no state income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents and businesses there don’t pay income tax to the state, but they still pay other state taxes (such as sales tax, property tax, or certain business taxes).
Another ten states have a flat income tax rate, meaning everyone pays the same percentage regardless of income level. These states are: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah.
The remaining states (plus Washington, D.C.) have graduated income tax systems, similar to the federal tax system. This means income is taxed in brackets—lower rates on the first portion of income and higher rates on higher income levels. Usually, these systems are simpler than the federal tax code, with fewer brackets and lower rates. Some states even automatically adjust their brackets for inflation.
What counts as income?
Each state defines taxable income differently, but generally, it includes:
- Wages and salaries
- Business income (profits from sole proprietorships, partnerships, LLCs, or S-Corps)
- Investment income (interest, dividends, capital gains)
- Rental income
- Certain royalties and licensing income
For corporations, “income” usually means net income after allowable deductions. Many states start with the federal taxable income figure and make adjustments according to state rules.
When do you need to file state income tax?
You typically need to file if you:
- Live in a state with income tax and meet the minimum income threshold.
- Earn income from business activity in that state, even if you live elsewhere.
- Have nexus (a tax connection) through physical presence, employees, or a certain level of sales.
- Own property in the state that generates income.
For non-U.S. residents with U.S. businesses, state income tax can apply if the company earns income tied to a state, regardless of where the owners live. For example, if you register in Delaware but have clients or staff in California, you might owe California state income tax. If you operate in multiple states, you may need to apportion income between them and file in more than one state.
Knowing which states have income tax—and how they tax—can help you plan where to register your business, where to hire, and how to structure operations for the most tax efficiency.
