Your Guide to Indiana’s State and Local Tax System
Indiana combines a flat state income tax with county-level income taxes that vary across all 92 counties — making it one of the more complex states for payroll withholding. The state rate is scheduled to decrease to 3.00% in 2026 (verify), and county rates range from 0.5% to over 3%. For payroll platforms and employers managing Indiana employees, both the state and county taxes must be withheld based on the employee’s county of residence, regardless of where the work is performed.
Indiana’s tax system combines state-level taxes with local county taxes, affecting what residents pay on their income, purchases, and property. If you live or work in Indiana, you’ll be paying federal income taxes and Indiana state and local taxes.
Whether you’re an employee receiving a paycheck or a business owner running a company, it’s important to understand how these taxes work together—keep reading to get the information you’re looking for.
Understanding Local and State Indiana Taxes
In this post, we’ll break down Indiana’s state income tax, county income taxes, sales taxes, and property taxes. We’ll also touch on how Indiana’s taxes compare to other states in the United States.
Indiana State Income Tax
Indiana has a flat state income tax.
For the 2024 tax year (returns filed in 2025), the state income tax is 3.05%. This flat rate applies to all taxpayers regardless of income or filing status. Most residents with modest earnings over $1,000 are required to file an Indiana return.
The rate was 3.15% in 2023 and will gradually drop to 2.9% by 2027 under current law.
Indiana doesn’t have a standard deduction but offers personal exemptions to reduce your taxable income. In contrast, the federal income tax system provides a large standard deduction in place of personal exemptions.
Each filer can claim a $1,000 exemption for themselves and an additional $1,000 for a spouse if filing jointly. If married filing separately, you only get the spouse exemption if your spouse had no income.
For a married couple filing jointly, that’s $2,000 in total exemptions. After exemptions, the remaining income gets taxed at a flat rate.
Keep in mind, you pay this state tax on top of your federal taxes. You still owe federal income tax to the IRS on your income, separate from Indiana’s tax. Indiana also has reciprocal agreements with several neighboring states.
There are also reciprocal agreement states to consider. If you’re an Indiana resident working in Kentucky, Michigan, Ohio, Pennsylvania, or Wisconsin, you pay income tax only to Indiana on those wages. Residents of those states who work in Indiana pay only their home state.
Local County Income Taxes in Indiana
Indiana counties collect local income taxes on top of the state tax. All 92 counties levy a local income tax, with rates ranging roughly from 0.5% up to 3%.
The average county rate is 1.6%, but each county sets its tax based on local budget needs. These local taxes are a significant source of tax revenues and help fund services like schools and public safety.
Indiana is one of only a few states in the United States where counties rely on local income taxes to finance a substantial share of local government.
As a resource from the Indiana Department of Revenue explains, you do not file a separate local return; county taxes are included on your state income tax returns:
“A copy of the state Federal Wage and Tax Statement, Form W-2, usually indicates the amount, if any, of LIT withheld. A separate line on the individual income tax return is provided to take credit for local taxes withheld.”
Indiana Sales Tax
Income taxes aren’t the only taxes Hoosiers pay; Indiana also has a 7% sales tax on most purchases. This sales tax is the same across the state—no local sales taxes are added.
Unlike some states that allow varied local sales taxes, Indiana’s 7% rate is uniform statewide. However, certain items are exempt from the 7% tax.
Groceries and prescription drugs are exempt, you won’t pay tax on those. However, prepared food (restaurant meals, takeout), candy, and soft drinks are taxed, as are clothing and most other goods.
For perspective, state sales tax rates in the United States range from 0% to over 7%, and many states add local sales taxes on top. Indiana’s flat 7% is among the higher state sales tax rates.
Still, because no local surtaxes are added, Indiana's overall sales tax burden is about average compared to other states. Big purchases like cars are also taxed at 7% (and an additional annual vehicle excise tax is charged when registering it).
Property Taxes in Indiana
Property taxes in Indiana are levied by local governments (counties, cities, towns), so rates differ depending on where you live. They provide significant tax revenues for local governments and fund local services.
However, state law caps how high property taxes can go. For owner-occupied homes (homesteads), the property tax cannot exceed 1% of the home’s assessed value per year.
The cap is 2% of the value for other residential property (like rental houses) and farmland and 3% for business and other property.
In practice, current rates in many areas are below these maximums. The statewide average effective property tax rate is around 0.7% of a home’s value, but higher-tax counties may be closer to the caps.
For instance, a $200,000 owner-occupied home would owe at most $2,000 in property tax annually (1% of its value). Indiana’s cap system ensures that while property tax rates vary across communities, they stay within a reasonable range for each property category.
Indiana also offers several property tax deductions for homeowners that help lower the taxable value of property for those who qualify. These include homestead and special breaks for seniors, veterans, etc.
Other Tax Considerations
- Indiana repealed its inheritance tax in 2013 and does not impose a state-level estate tax.
- Indiana also does not tax Social Security benefits—though they may be partially taxable under federal tax rules.
- Indiana’s corporate income tax rate is 4.9%, which applies to corporate profits.
- If you’re a business owner with employees, note that employers must pay state unemployment insurance taxes to fund unemployment benefits. Workers do not pay this tax; the employer pays it.) Employers also pay a small federal unemployment insurance tax (FUTA) on wages.
- Remember that federal payroll taxes for Social Security and Medicare are separate from Indiana’s taxes. The IRS collects those federal payroll taxes to fund federal programs and apply no matter which state you live in.
Indiana’s county-level tax system is one of several unique local tax structures across the U.S. For the full picture, see our local payroll tax guide.
Conclusion: Ready to Simplify Indiana Tax Withholding?
Keeping up with Indiana’s combined state and local tax rules can be tricky—especially when county rates vary and exemptions shift.
Symmetry’s payroll solutions make it easier for employers and tax professionals to calculate accurate withholding for Indiana employees, no matter where they live or work.
We cover more state and local tax topics in these articles:
FAQs: Indiana State and Local Taxes
What is the current Indiana state income tax rate?
Indiana has a flat state income tax rate. For 2026, the rate is 3.05% (verify — it is scheduled to decrease incrementally to 2.9% by 2027 under current law). The flat rate applies to all taxable income regardless of filing status or income level..
Does Indiana charge local income taxes, and how much are they?
Yes. All 92 Indiana counties levy their own county income taxes, with rates ranging from approximately 0.5% to over 3.3%. County taxes are based on where the employee lives, not where they work — making accurate residential address determination critical for correct withholding. You can check the Indiana Department of Revenue website for the current rates in your county.
What states have reciprocity agreements with Indiana?
Indiana has reciprocity agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. Residents of those states working in Indiana can file Form WH-47 to be exempt from Indiana state withholding and have only their home state’s tax withheld.
How are Indiana county taxes determined for payroll?
Indiana county income tax is withheld based on the employee’s county of residence, not their work location. The employer must determine which county the employee lives in and apply that county’s tax rate. Rates are published annually by the Indiana Department of Revenue and can change each year.