Local Taxes
Explore local taxes in the U.S. and understand employer and employee responsibilities.
Overview
In the United States, various local jurisdictions, including cities, counties, and school districts, may impose a local income tax. These taxes are often required to be paid by employers on behalf of their employees and are used to fund local government programs and services.
In addition to federal and state income taxes, some cities or municipalities also impose their own income tax. Employees working in these areas may have this local income tax withheld from their paychecks.
The responsibility for paying local taxes can fall on either the employer or the employee, depending on the specific locality.
Local Tax Examples
Employer Local Taxes:
- Washington, D.C.: Washington, D.C., imposes a payroll tax on employers with payrolls exceeding a certain threshold. The payroll tax rate is determined based on the employer's gross receipts and the amount of payroll expense attributable to Washington, D.C.
- Oregon Bureau of Labor and Industries: The Oregon Bureau of Labor and Industries (BOLI) administers the Oregon Family Leave Act (OFLA), which requires certain employers to pay a small payroll tax to fund the state's family leave insurance program. The tax is used to provide partial wage replacement benefits to eligible workers who take family leave for specified reasons.
- New York City: New York City imposes several local taxes that employers may be required to pay on behalf of their employees. These taxes may include the Metropolitan Commuter Transportation Mobility Tax (MCTMT), among others.
Employee Local Taxes:
- Pennsylvania: Philadelphia is known for its city wage tax, which is a tax on salaries, wages, and other compensation earned by residents of Philadelphia or non-residents who work in the city. Other municipalities in Pennsylvania may also impose local income taxes - see additional information below!
- New York: New York City imposes its own local income tax, commonly known as the NYC Income Tax, in addition to New York State income tax.
- Ohio: Several cities in Ohio levy local income taxes, including Cincinnati, Cleveland, and Columbus. These taxes are typically based on the amount of income earned by residents or non-residents who work within the city limits.
Local Tax Calculations
Each local tax jurisdiction varies in how local taxes will be calculated. The following methods may be used:
- Flat percentage tax rates are charged across all income levels calculated as a percent of an employee’s taxable wages.
- Flat dollar amounts are charged across all income levels withheld per pay period or once a month after an employee earns a minimum amount in any given month.
- Fixed dollar amount is calculated at a fixed dollar amount per year and it is withheld per pay period.
- Progressive tax rates apply a progressive, variable percentage amount, dependent on the employee’s income.
Pennsylvania Local Taxes
In Pennsylvania, employers are responsible for withholding local taxes for their employees, including the Earned Income Tax (EIT) and Local Services Tax (LST). Since Pennsylvania has hundreds of localities, knowing what should be withheld and at what rate can be complicated, so Check is here to help!
Tax Types
There are three main tax types based on where employees live and work:
- Earned Income Tax (EIT): A tax on income earned by residents of a municipality, as well as non-residents working within that municipality.
- Municipal Local Services Tax (LST): A flat-rate tax imposed on individuals working in certain municipalities.
- School District Tax (SD LST): The school district LST is imposed by the local school district, not the municipality. Each school district has the authority to levy this tax.
Tax Collectors
It can be unmanageable to apply for hundreds of local tax accounts, so Pennsylvania has larger Tax Collectors that manage multiple individual local tax districts, allowing employers to apply for IDs, file, and remit taxes to a handful of Tax Collectors, rather than dealing with hundreds of individual agencies.
How it looks in payroll
EIT is primarily a resident tax, but it's remitted to the tax collector responsible for the employer's workplace location. For example, the EIT withholding on the paystub will show as the EIT in the work location, not the residency location. This is expected!
When filing the EIT return, the PSD codes for both the resident and work localities are reported to the tax collector. The workplace's tax collector is then responsible for transferring the taxes to the employee’s residential tax district. In this process, both resident and non-resident taxes are sorted and remitted accordingly.
While this can be confusing,Check processes payroll in line with Pennsylvania's guidance. Not all payroll providers will withhold taxes like this - some may withhold based on the resident tax, so employees may have a varied experience.
FAQs
Are local taxes reported on the W-2?
Form W-2 will list the amount of taxes withheld from each employee’s wages, including local taxes. The local wage, local tax, and locality name will be recorded in boxes 18, 19, and 20 respectively.
Which local taxes will Check calculate, file, and remit for employers?
Please review Tax Forms Filed by Check & Check's Unsupported Features to verify if Check will file the applicable local taxes on your employer's behalf.
Last updated on January 31, 2025