Cities, counties, local governments, and school districts in 12 U.S. states impose a local income tax. This is in addition to state tax. You are required to withhold local income tax from employee wages as part of your tax withholding obligations. While most states impose a local income tax as a tax on wages, some levy it as a percentage of the state income tax.
The 12 states that charge local income tax are:
- New Jersey
- New York
- West Virginia
Local income taxes are used to fund local programs, such as education, parks, and community improvement.
School district tax
School district tax is a specific kind of local tax. School districts in Ohio and Pennsylvania can impose this tax to help fund school operating costs. Schools can impose the tax either as an income or property tax.
If a school district imposes a local tax, all residents within the school district’s boundaries pay the tax, even if they work outside of the boundaries.
Types of local income tax
Some local income taxes are permanent—often used to fund operating budgets. Other local income taxes are temporary and fund a specific purpose.
Some locations charge a flat tax rate. This means a single rate applies across all income levels.
Other locations have progressive local income tax rates. This means the tax rate increases as someone’s income level increases.
Employers must pay a local income tax in some locations. Locations in Colorado charge employers a few dollars over a period of time for each employee at the business.
Some types of income might be exempt from local income tax, such as retirement income or income from investments. Tax computation, collection, and spending vary across the different jurisdictions where local income tax is imposed. Consult your local laws to understand the specific tax requirements.
Local income tax withholding
If you do business in a location that imposes a local income tax, you must deduct the tax from employees who live within the same location as the work site. In Pennsylvania, you must also withhold local income tax from all employees who live outside of the municipality where the work site is located.
For local income tax withholding, you should register with the earned income tax officer of the school district or location where your business is located.
Every time you run a payroll, calculate each employee’s taxable wage. Then, determine how much to withhold by using tax tables or multiplying by the local rate. If you use a payroll software, it should calculate the withholding for you.
Once you withhold local taxes, you need to remit them. Often, local taxes are due quarterly, but due dates vary. Check with your local taxing agency to find out when you need to deposit local taxes.
After the end of the year, you will send Form W-2 to everyone you employed during the year. Form W-2 will list the amount of taxes you withheld from each employee’s wages.
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This article was republished on 10/20/2015 to reflect current information. (Original publication was 4/19/2012.)