Do Federal Employees Pay State Taxes?
Navigate state tax rules as a federal employee. Learn how your residency and specific circumstances shape your tax responsibilities, even across state lines.
Federal employees, like other citizens, are subject to state income taxes. This article clarifies when and how federal employees are taxed, detailing the factors that determine tax liability and outlining common scenarios.
General Rule: State Tax Liability for Federal Employees
Federal employees are subject to state income taxes, similar to private sector employees. Federal employment status does not grant an exemption from state income tax obligations. The Public Salary Tax Act of 1939 clarified this principle, allowing states to tax federal employees and eliminating previous exemptions.
Before this act, a doctrine of intergovernmental tax immunity suggested federal salaries were immune from state taxation. However, the Public Salary Tax Act and Supreme Court decisions affirmed states could levy non-discriminatory income taxes on federal employee compensation. Therefore, if a state has an income tax, federal employees residing or earning income there must pay it.
Determining State Tax Obligation: Residency and Duty Station
The primary factor determining which state a federal employee owes income tax to is their legal residency, or domicile. Domicile refers to an individual’s permanent home, the place they intend to return to after temporary absences. A person can only have one domicile at any given time, and this state holds the primary right to tax their worldwide income.
States consider various factors when establishing domicile, including voter registration, driver’s license, vehicle registration, property ownership, and the location of bank accounts. The state where one spends the majority of their time, maintains family ties, and keeps important belongings also contributes to determining domicile. While a federal employee’s duty station might be in a different state, their tax obligation remains with their state of domicile.
Working in a state different from one’s domicile can create a non-resident filing requirement in the work state, particularly if no reciprocity agreement exists. The primary tax liability for overall income rests with the state of domicile. States use a “statutory residency” test, which may deem an individual a resident for tax purposes if they spend a certain number of days, often 183 days or more, within the state, even if their domicile is elsewhere. This can complicate tax situations, potentially leading to dual residency for tax purposes, though states provide credits to prevent double taxation.
Common Scenarios and Exceptions
Specific situations and legal provisions can modify a federal employee’s state tax liability. Military personnel benefit from the Servicemembers Civil Relief Act (SCRA). The SCRA allows military members to maintain their state of domicile for tax purposes, regardless of where they are stationed due to military orders. This protection extends to military pay and personal property, ensuring they are not taxed by a state where they are temporarily stationed. The Military Spouses Residency Relief Act (MSRRA) further extends these protections to military spouses, allowing them to retain their domicile for tax purposes when accompanying a service member on orders.
Another scenario involves residing in one of the states that does not levy a state income tax. As of 2025, nine states do not have a broad individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Federal employees domiciled in these states would not owe state income tax on their federal wages to their resident state.
Some states have reciprocity agreements, allowing residents who work in a different state to pay income tax only to their home state. These agreements simplify tax filing by preventing double taxation and eliminating the need to file a non-resident return in the work state. If such an agreement exists between an employee’s resident state and their work state, employers withhold taxes only for the state of residence.
State Tax Withholding and Filing
Federal agencies are responsible for withholding state income taxes from federal employees’ paychecks. This withholding is based on information provided by the employee, through a state-specific W-4 form or the federal W-4 form, depending on the state’s requirements. Employees are responsible for ensuring their withholding accurately reflects their expected state tax liability to avoid underpayment or overpayment.
At the end of the year, federal employees receive a Form W-2, Wage and Tax Statement, which reports their state wages and the amount of state tax withheld. Despite withholding, federal employees are still required to file state income tax returns in their state of residency. They may also need to file a non-resident return in their duty state if they earned income there and no reciprocity agreement applies. This filing process settles the final tax obligation for the year. It is advisable to consult with a tax professional or the relevant state’s tax department for personalized guidance.