No State Tax

• As of 2011, there are seven states that do not levy income taxes against their residents. Thus, employers in these states do not have to withhold state income tax from employees' paychecks. Employers still have to withhold federal income tax from all employees' paychecks regardless of whether the state has an income tax or not. The seven states are Alaska, Florida, Nevada, Texas, South Dakota, Washington and Wyoming.
  
  

Tennessee and New Hampshire

• Although Tennessee and New Hampshire have a state income tax, they do not tax earned income; they only tax investment income and other income not related to employment. Thus, these states do not require employers to withhold income taxes from employees' paychecks even though they charge income taxes to some residents, and employees enjoy the same benefits as residents of states who do not have any income tax.
  
  

Advantage

• If a state does not charge income tax, employees get to take home slightly more of their paychecks each pay period because their employers withhold less of their paycheck for taxes. Employees in these states may therefore be in a slightly better financial condition than those in states that charge income tax. However, federal income taxes tend to be far higher than state taxes, so employees may not see a large difference in their paychecks.
  
  

Warning

• Employers who have employees in more than one state should familiarize themselves with each state's income tax laws and withhold taxes from paychecks accordingly so that they do not run afoul of any state's income tax laws. In addition, employers who violate the federal rules face stiff penalties including jail time. Thus, employers must make sure they withhold federal taxes from employees' paychecks even if their state does not levy a state income tax.