Cities, counties, and local government bodies in 14 U.S. states impose local income tax, in addition to state tax. Employers are legally required to withhold local income tax from employee wages as part of their overall federal income tax withholding obligations. While most states levy local income tax as a tax on wages, some levy it as a percentage of the state income tax. The 14 states that charge local income tax are:
- New Jersey
- New York
Flat tax rates are charged in some states, wherein a single rate is applicable across all income levels. Others have progressive local income tax rates, in which rates increase with the rise in income levels. There may be some exemptions, such as for retirement income or income from investments. Tax computation, collection, and spending vary across different jurisdictions where local income tax is imposed. Employers are advised to consult local laws to understand the specific tax requirements.
All employers doing business within the taxing jurisdiction must deduct local services tax and earned income from employees who live within the same municipality where the work site is located. In Pennsylvania, employers must withhold local payroll taxes from all employees who live outside of the municipality where the work site is situated.
For local income tax withholding, an employer can register with the earned income tax officer of the school district or municipality where the particular business site is located. Registration for local services tax can be done with the local services tax officer of the municipality or school district where the business site is located.
Upon an employee’s resignation, the previous employer is not liable for deducting local income tax for the rest of the year. The employer is legally obligated to withhold tax only for the payroll periods during which the individual was employed. The responsibility of deducting local income tax from wages will lie with the future employer.