If employees reside in one city and work in another, they may be required to pay local taxes for both cities. Courtesy withholding is an optional benefit in which employers collect a local income tax for employees who live in another city. Through courtesy withholding, employees need not pay local taxes separately, as the employer deducts these amounts and pays them on the employee’s behalf.
Who Keeps Track of Courtesy Withholding?
While the payment of local taxes may be mandatory for the employee, courtesy withholding remains the prerogative of the employer. Courtesy withholding can mean more paperwork for the employer. Employers must apply for withholding account numbers in all local taxing jurisdictions, so if they have many employees living in different cities, this may mean multiple accounts to manage. In addition, the city will determine the frequency of deposits that an employer has to make and filing deadlines. Many small business employers may use an online payroll to help manage courtesy withholding.
Most U.S. municipalities levy higher residence taxes than non-residence taxes. In most cities, the local tax is fixed at around 1% for residents, while non-residents are required to pay about 0.5% towards municipal taxes.
Generally, if the local taxes add up to $10 or more, employers are required to pay the withheld tax amount within 30 days after the end of each quarter. If the tax amount is lower than $10, employers are required to withhold the full amount from the first pay of the year.
If an employee leaves the company, the employer is no longer required to collect taxes from the employee for the remaining quarters. The responsibility of withholding local taxes shifts to the new employer after resignation.