How to Compute Indiana County Payroll Withholding

How to Compute Indiana County Payroll Withholding

The state of Indiana requires employers to withhold state income tax as well as county tax at the applicable rates. Employers are expected to withhold these taxes from all employees including part-time, temporary and seasonal employees.

The withholding of income taxes is required for all nonresidents employed in Indiana however Indiana has established a reciprocity agreement with a number of states. If an employee resides in one of these states, Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin, they are not required to pay Indiana state income taxes. The reciprocity agreements encourage employers to withhold local option income taxes such as Indiana County Adjusted Gross Income Tax (CAGIT), County Economic Development Income Tax (CEDIT), or County Option Income Tax (COIT) at the nonresident rate if applicable. Employers are also encouraged to withhold the appropriate taxes on behalf of the state where the employee resides.

Indiana has developed a deduction constant table to assist in calculating state and county income tax. The deduction constant table will determine the dollar amount of the exemption employers should deduct each pay period from their employee's gross income. Each employee is entitled to a $1000 deduction per year per exemption and most employees are entitled to a $1500 deduction per year per qualified dependent.

Using Indiana deduction constant table (Departmental Notice #1) and published county tax rates , which can be found online at the state of Indiana Department of Revenue website, employers are able to calculate state and county withholding.

For example an employee is paid $2000 bi-weekly and is subject to a resident county tax rate of .0125. This employee claims 4 personal exemptions, 2 dependent exemptions. The taxable income based on the deduction constant table is $1730.77, making the income tax withholding $58.85 and the county tax withholding $21.63.

All Indiana employers can access the deduction constant table and tax rate tables however to make the payroll process simpler employers can utilize payroll software. Indiana payroll solution will automatically calculate Indiana state and county income tax withholding.

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