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Some localities use local income tax to fund schools.

What Is Local Income Tax?

Cities, counties, and other small areas across the U.S. impose a local income tax. Find out what your responsibilities are for withholding the tax from employee wages.

What is local income tax?

Local governments in several states impose a local income tax. Local taxes are in addition to federal and state income taxes. Local income taxes generally apply to people who live or work in the locality. As an employer, you need to pay attention to local taxes where your employees work.

If the local income tax is a withholding tax, then you are required to withhold it from employee wages. Or if the local income tax is an employer tax, you must pay it.

Local income taxes are typically 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. Schools can impose this tax to help fund school operating costs. The school district tax might be 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.

If a school imposes a school district income tax, you may need to handle it.

States with local income tax

The following states charge local income tax:

Graphic of state with local income tax.

  • Alabama
  • Arkansas
  • Colorado
  • Delaware
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Michigan
  • Missouri
  • New Jersey
  • New York
  • Ohio
  • Oregon
  • Pennsylvania
  • West Virginia

Types of local income taxes

Some local income taxes are permanent—often used to fund operating budgets. Other local income taxes are temporary and fund a specific, short-term purpose. Because local taxes change, you need to make sure your withholdings and records are up to date.

Local income taxes are often paid by the employee but are withheld and deposited by the employer. But in some locations, the tax is paid by the employer.

Some locations charge a flat tax rate. This means a single rate applies across all income levels. For example, all employees owe a 2% local tax on their wages.

Other locations have progressive local income tax rates. This means the tax rate increases as someone’s income level increases.

And still, some locations want workers to pay a flat dollar amount, no matter their income level. For example, all employees have to pay $2 per week.

Employers must pay the local income tax in some locations. For example, there is a Colorado occupational privilege tax in some locations. Employers must pay a few dollars over a period of time for each employee at the business.

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.

Withholding local income tax

If an employee works in a location that imposes a local income tax, you must deduct the tax from their wages.

For local income tax withholding, you should register with the income tax office of the school district or location where your business is located.

Every time you run a payroll, calculate each employee’s taxable wages. Then, determine how much to withhold by using tax tables or multiplying by the local rate. If you use 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.

Do you need help figuring out your local tax obligations? Our Full Service payroll software will calculate how much to withhold from employee wages, and we will submit the taxes for you. Try it for free!

This article is updated from its original publication date of 4/19/2012.

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