Indiana Cuts State Withholding Rate to 2.95% for 2026 — Six Counties Also See Rate Increases
Indiana's state income tax withholding rate decreases from 3.00% to 2.95% effective January 1, 2026. Simultaneously, six Indiana counties have income tax rate increases. Both changes are in the revised Departmental Notice No. 1.
- Indiana state withholding rate decreases to 2.95% (from 3.00%) effective January 1, 2026.
- Supplemental wage withholding rate also decreases to 2.95% — matches the new standard rate.
- Six Indiana counties have income tax rate increases effective January 1, 2026 — including Carroll County.
- All 92 Indiana counties impose county income tax — verify the correct rate for each employee's relevant county.
- Employers must apply both changes simultaneously — applying only one will result in incorrect withholding.
Indiana's Phased Tax Rate Reduction Continues
Indiana is midway through a legislatively enacted, multi-year phased reduction of its flat state income tax rate. The rate decreased from 3.05% in 2024 to 3.00% in 2025, and now falls to 2.95% effective January 1, 2026. Future reductions are already scheduled: the rate will drop to 2.90% in 2027, with additional reductions planned beyond that, contingent on state revenue benchmarks. The 2026 rate applies to all taxable income earned on or after January 1, 2026.
| Tax Year | State Flat Rate | Change vs. Prior Year |
|---|---|---|
| 2024 | 3.05% | ↓ Phased reduction |
| 2025 | 3.00% | ↓ −0.05% |
| 2026 | 2.95% | ↓ −0.05% |
| 2027 (scheduled) | 2.90% | ↓ −0.05% |
State Rate: 2.95% — Withholding and Supplemental Wages
For payroll purposes, the 2.95% rate applies to all Indiana state income tax withholding for wages paid on or after January 1, 2026. The supplemental wage withholding rate also decreases to 2.95% from 3.00%, since Indiana applies its flat rate uniformly to both regular and supplemental compensation. Employers withholding on bonuses, commissions, severance, or other supplemental wages must update their supplemental rate accordingly. No action is required from employees; payroll system updates implement the change automatically.
Indiana does not permit employees to claim exemption from state withholding. Tax is computed based on exemptions claimed on Form WH-4 (Indiana's equivalent of the federal W-4), using a $1,000 personal exemption per allowance claimed. The deduction constant tables published in Departmental Notice #1 are unchanged for 2026.
Six Counties with Rate Increases Effective January 1, 2026
Indiana uniquely requires employers to withhold county income tax for all 92 counties, in addition to the state rate. County rates are based on the employee's county of residence — not the employer's county or the county where work is performed. This is a common source of payroll errors in Indiana. Six counties increased their rates for 2026, as published in the Indiana DOR's revised Departmental Notice #1:
| County | 2025 Rate | 2026 Rate | Increase |
|---|---|---|---|
| Carroll County | 2.2733% | 2.4733% | ↑ +0.20% |
| Grant County | 2.55% | 2.75% | ↑ +0.20% |
| Greene County | 2.15% | 2.35% | ↑ +0.20% |
| Howard County | 2.15% | 2.35% | ↑ +0.20% |
| Shelby County | (prior rate) | (increased 2026) | ↑ Increased |
| Union County | (prior rate) | (increased 2026) | ↑ Increased |
Indiana County Withholding Rules
Indiana's county income taxes come in two forms: the County Option Income Tax (COIT) and the County Economic Development Income Tax (CEDIT). Both operate identically from a withholding perspective — employers withhold at the rate assigned to the employee's county of residence and remit to the Indiana DOR, which distributes funds to the appropriate county. There is one rate per county applied to the same taxable income base as the state tax.
County rates across Indiana's 92 counties range from approximately 0.50% in lower-rate counties to over 3.38% in higher-rate counties. For employees with wages near the median and combined state-plus-county rates, total Indiana income tax withholding (state + county) commonly ranges from 3.5% to 6.4% depending on county of residence. This combined rate should be factored into total compensation analysis for employees considering relocation within the state.
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