The Indiana Department of Revenue (DOR) has issued its updated Departmental Notice #1: How to Compute Withholding for State and County Income Tax, effective for payroll periods beginning on or after October 1, 2026.
Because Indiana allows local counties to adjust their income tax rates twice a year (January 1 and October 1), employers and payroll administrators must review this notice carefully to ensure their Q4 withholding calculations are accurate.
Here are the key takeaways from the latest release:
1. State Income Tax Rate Remains Flat
The Indiana individual adjusted gross income tax rate remains at 2.95% for the 2026 tax year. Employers will continue to use this rate for state-level withholding calculations alongside the updated Deduction Constant Tables (Tables A, B, and C) provided in the notice.
2. October County Tax Rate Updates
Local county income tax rates can fluctuate. In the updated Notice #1, employers should check the county tax rate chart starting on page 5. Any county with an asterisk (*) next to its name indicates that the tax rate has changed since the previous notice was published on January 1, 2026. Employers must update their payroll systems immediately for employees subject to these specific county taxes.
3. Refresher: How to Determine the Correct County Rate
Indiana county taxes are sourced based on the "January 1 rule":
- Residents: Withholding agents should withhold county tax based on the employee’s Indiana county of residence as of January 1 of the current tax year.
- Non-Residents: If the employee resides out-of-state on January 1 but has their principal place of work or business in an Indiana county as of January 1, they are subject to the tax rate of that specific Indiana county.
- Mid-Year Moves: If an employee moves to a different county or changes jobs to a new county after January 1, their withholding county does not change until the following tax year.
Action Required for Employers
Employers should verify that their payroll software or manual calculation sheets reflect the October 1, 2026 county rate changes. You will need to apply the updated rates in conjunction with each employee's current Form WH-4.
Download the full Indiana Departmental Notice #1 (Effective Oct. 1, 2026) Here