Federal vs. State Income Tax: What's the Difference?

Two Separate Taxes on Every Paycheck

Most American workers pay two different income taxes out of every paycheck: federal income tax, which goes to the IRS and applies to everyone, and state income tax, which goes to your state government and varies wildly depending on where you live and work.

These two income taxes aren't the only deductions on your paycheck — most workers also pay FICA taxes (Social Security and Medicare), calculated completely separately from federal and state income tax.

How Federal Income Tax Works

Federal income tax uses a progressive bracket system with rates from 10% to 37% in 2026. "Progressive" means only the portion of your income that falls into a given bracket is taxed at that bracket's rate — your entire salary is never taxed at one flat rate, even if you're in a high bracket.

Your federal tax also depends on your filing status (Single, Married Filing Jointly, Head of Household) and the standard deduction, which reduces your taxable income before brackets are applied.

How State Income Tax Works

State income tax rules vary dramatically:

• No income tax — 9 states (listed above) don't tax wages at all
• Flat tax — states like Pennsylvania (3.07%) and Illinois (4.95%) tax all income at one rate
• Progressive tax — states like California (1%–13.3%) and New York (4%–10.9%) use brackets similar to federal

Some states also allow local income taxes on top of state tax — for example, New York City adds its own city tax for residents.

Side-by-Side Example: $70,000 Salary

Want to see this with real numbers? Check out our full breakdown of a $75,000 salary in Texas — federal tax, FICA, and zero state tax combined.

How Employers Estimate Withholding

Your employer doesn't know your exact annual tax bill in advance — they estimate it using the information on your Form W-4 (federal) and your state's equivalent withholding form, then withhold a portion of each paycheck so you (ideally) owe little to nothing — or get a small refund — at tax time.

Does Where You Live vs. Where You Work Matter?

Generally, state income tax is based on where you physically work, not where you live. If you live in one state and work in another, you may need to file returns in both — though most neighboring states have reciprocity agreements to prevent double taxation.

Frequently Asked Questions

Do I pay state income tax based on where I live or where I work?

Generally, state income tax is based on where you physically work, not where you live. If you live in one state and work in another, you may need to file in both — though many neighboring states have reciprocity agreements that prevent double taxation.

Which states have no state income tax?

Nine states charge zero state income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. You'll still owe federal income tax and FICA in these states.

Is federal income tax the same no matter what state I live in?

Yes. Federal income tax brackets, rates, and the standard deduction are identical nationwide — only your state (and sometimes local) income tax varies based on where you live and work.

Can I be taxed by two states on the same income?

It's possible if you live in one state and work in another without a reciprocity agreement between them — but most neighboring states have agreements specifically to prevent this kind of double taxation.

Are local city or county taxes part of state income tax?

No, local taxes are separate. Some states — like New York with New York City — allow cities or counties to add their own local income tax on top of the state rate, which shows up as its own line on your pay stub.