What Is Occupational Privilege Tax? State Requirements Explained

Gabrielle Sinacola | Jun 24, 2024

What Is Occupational Privilege Tax? State Requirements Explained

Federal tax laws are required for all employers and employees. These laws generally don’t change, no matter where your business is located. Each state may have its own unique tax requirements, and beneath those, each city or county may have additional tax requirements. The occupational privilege tax is a smaller-scale requirement that only applies to certain local areas.

Here’s what employers need to know about occupational privilege tax and how Mosey can help you stay compliant with state and local tax laws.

What Is Occupational Privilege Tax?

Every state has certain mandatory taxes, like FUTA, SUTA, and SUI. States that need additional funding sometimes choose to enact local taxes for specific purposes.

Occupational privilege tax, a type of local income tax, is a jurisdictional payroll tax that is split between the employer and the employee. Not all jurisdictions require occupational tax.

Jurisdictions that wish to recover benefits that are given to taxpayers as a result of their employment have the ability to utilize a “head tax” to collect a small amount of tax from each eligible employee each pay period.

Taxes Similar to Occupational Privilege Tax

Colorado is a state that refers to this tax as an “occupational privilege tax.” Other states have similar taxes under different names.

A similar tax may be called an occupational tax, wage tax, income tax, local income surtax, local intangibles tax, occupational license tax, earnings tax, payroll tax, or something even more specific if the local tax is earmarked for a specific purpose.

What Happens When an Employee Lives and Works in a Different Place?

Cities and counties that impose an occupational privilege tax do so based on the location of a workplace rather than where employees live.

Employees who commute, work remotely, or work in satellite offices will be responsible for occupational privilege tax based on where they work. This can be tricky to navigate in some situations. If the employee works for the company in a satellite office in an area that isn’t subject to occupational privilege tax, they may not have to contribute to occupational privilege tax. Consult with a tax professional to determine where you are required to report an employee’s income and pay taxes.

If your main office is in Denver and your employee works at an office in Aurora, their occupational privilege tax contribution should match the amount and threshold for Aurora rather than Denver. Tax responsibility is assigned to the area where the employee works rather than where the employer is located.

How Is Occupational Privilege Tax Assigned When an Employee Has Multiple Jobs?

If an employee has more than one job and only one job is in a jurisdiction with occupational privilege tax, they’ll only be responsible for tax in that jurisdiction. If they work in two occupational privilege tax jurisdictions, they won’t be double-taxed.

Employees who meet the income threshold for both jurisdictions will only be responsible for occupational privilege tax in the jurisdiction where they work most of the time. If they work 26 hours a week in one area and 14 hours a week in another, they’re only paying taxes on their primary work income.

Other types of local income tax may not be the same. Some employees are expected to pay taxes at rates assigned to the municipalities where they live rather than where they work. Since different municipalities across the country can set their own rules, it’s best to double-check with local laws before assuming how much tax to withhold and where to remit that tax.

Alabama Occupational Tax

Every municipality in Alabama can enforce an occupational tax of one percent of an employee’s total gross income. Birmingham currently utilizes this system by taxing people who work in Birmingham but do not have a primary residence there.

Alabama’s occupational tax is currently under review, and the rules may change, prohibiting the use of occupational tax under most circumstances. This situation is still developing. It’s best to check the laws of your workplace’s municipality for more specific, up-to-date information.

Colorado Occupational Privilege Tax

Three cities in Colorado use occupational privilege taxes, each with its own amounts, limits, and thresholds.

Aurora

Employees in Aurora who make more than $250 per month are responsible for contributing two dollars in occupational privilege tax per month. Employers must contribute three dollars per month per employee to occupational privilege taxes.

Denver

Employees in Denver making more than $500 per month are liable for $5.75 per month in occupational privilege tax. Employers must contribute four dollars per month per employee for occupational privilege taxes.

Glendale

Glendale employees earning more than $750 per month must pay five dollars per month in occupational privilege tax. Glendale employers must match their contribution of five dollars monthly.

Greenwood Village

In Greenwood Village, occupational privilege tax has two portions. Both the employee and employer portions are $2 per month for a total of $4 per month, and both portions apply when an employee earns $250 or more in a calendar month. Owners, partners, and officers may only be subject to the employer portion if they do not earn a minimum of $250 a month.

Sheridan

In Sheridan, there is a $3 per month occupational privilege tax due from each employee through payroll withholding. A match of $3 per month is also due from the employer for each employee, and the employer is also responsible for remitting both the employee and employer portions of the tax to the City of Sheridan.

Delaware Wage Tax

Delaware imposes a graduating state income tax on employee wages, spanning from 2.2 percent to 6.6 percent of total income. Withholding and remitting this tax from employee wages is the employer’s responsibility. The tax should already be removed from each employee’s take-home pay.

Residents of Wilmington, Delaware, are subject to unique local income taxes. Wilmington residents pay an additional 1.5 percent flat rate earned income tax.

Indiana Income Tax

Indiana utilizes a statewide 3.15 percent wage tax on all income earned by Indiana residents. Each county has the ability to impose a separate wage tax. Tax rates range from 0.5 to three percent flat rate on all earned wages in addition to the statewide tax. There are 92 total counties in Indiana, so it’s important to double check rules from county to county. Many people in the same workplace will be subject to different tax rates.

Iowa Local Income Surtax

Many jurisdictions in Iowa tax wages for specific initiatives. Iowa uses the local income surtax to fund education initiatives and to fund emergency medical support. Most districts participate in the surtax program. Rates vary from one percent to 12 percent in income surtax to support schools within that district. There are more than 450 separate districts, making it important for employers to verify district tax rate percentages.

Kansas Local Intangibles Tax

The Kansas Local Intangibles Tax applies to things like stocks, bonds, savings accounts, and accounts receivable. This rule applies to individuals and corporations. Both counties and cities can set intangible tax rates. Most counties set their rates lower and cities set their rates higher.

The average rate is 2.25 percent, but jurisdictions have the freedom to set higher or lower rates according to their unique needs.

Kentucky Occupational License Tax

Some states charge regulatory license fees. Kentucky utilizes the occupational license tax to recapture regulatory fees in the form of a tax. The state gives cities the power to charge certain types of businesses and certain types of professionals a tax on the revenue they earn.

Some cities charge a business license fee, which is a flat annual rate to be paid at once. Other cities charge a percentage per month or per pay period.

There are 90 counties in Kentucky that currently utilize their own local occupational license tax system. The rules can differ in each county. It’s best to double-check with your county’s specific requirements and make sure that branches of your business in different counties utilize county-specific rules.

Maryland Income Tax

All 23 counties and the City of Baltimore impose a local income tax on wages. Each county sets its own flat rate for all taxable income earned by residents of the county or city. Rates span between 2.25 and 3.20 percent of total taxable income. Anne Arundel County and Frederick County are the only two counties that use a bracket system where higher earners are taxed at higher rates.

Michigan Income Tax

Every city in Michigan has the option to opt into a local income tax. Most cities that opt-in use standardized rates. Four cities in Michigan impose a unique local income tax in addition to state income tax. Rates differ for residents and non-residents.

  • Detroit: 2.4 percent for residents, 1.2 percent for non-residents
  • Grand Rapids: 1.5 percent for residents, 0.75 percent for non-residents
  • Highland Park: Two percent for residents, one percent for non-residents
  • Saginaw: 1.5 percent for residents, 0.75 percent for non-residents

Other Michigan cities impose a flat one percent local income tax for residents and 0.5 percent for non-residents: Albion, Battle Creek, Benton Harbor, Big Rapids, East Lansing, Flint, Grayling, Hamtramck, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Springfield and Walker.

Missouri Earnings Tax

The Missouri earnings tax, also called the e-tax, is specific to Kansas City and St. Louis. People who live in these cities are required to pay one percent of all earnings generated within the city. This rule also applies to non-residents who work in e-tax jurisdictions. Businesses must also pay the e-tax on their earnings, which may be taxed at different rates depending on the type of business and the amount of revenue generated.

New Jersey Payroll Tax

Newark and Jersey City have special local payroll taxes in addition to statewide taxes. Newark employers are taxed an additional one percent on employee wages on a quarterly basis. Jersey City imposes a one percent quarterly tax for wages paid to all non-resident employees if they earn more than $2,500 in a single quarter.

New York Income Tax

New York State Income Tax (SIT) has different withholding rates in each jurisdiction. New York State’s rate is 11.7 percent, New York City’s rate is 4.25 percent, Yonkers’ rate is 1.95 percent, and the rate for nonresidents is 0.5 percent.

Ohio Municipal Income Tax and School District Income Tax

The state of Ohio allows municipalities to enact wage or salary taxes at a flat percentage rate for residents and non-residents who work within each municipality. Since each municipality can set its own rules for the type of income taxed and the percentage of tax, it’s best to check with local laws for the most up-to-date information.

Similarly, school districts are allowed to set local taxes to fund local schools. Rates vary significantly throughout the state of Ohio and its numerous school districts.

Oregon Transportation District Income Tax

Oregon’s statewide transit tax requires employees to pay 0.10 percent of their wages in taxes to fund transportation initiatives in their districts. This tax comes directly from employees and employers are not expected to watch or contribute to these taxes — only to withhold and remit them.

Pennsylvania Wage Tax

Pennsylvania allows municipalities to require a local earned income tax and a local services tax with rates assigned to employees by their postal address codes. Employers are required to have employees complete a Residency Certification Form, which verifies that employees are taxed at the correct rates for their municipalities.

West Virginia City Service Fee

Each city in West Virginia has the ability to charge residents a weekly fee deducted from their wages in the form of a tax. This fee is usually a flat rate. Cities tend to charge between three and five dollars per week, with funds going directly to city maintenance. Employee city service fee taxes are to be remitted to the city where they work, whether they work at a physical location or work from home.

Staying Compliant With Local Income Taxes

Local income taxes can be a lot to manage, especially if you have employees who live in different municipalities or are impacted by different tax rates. It’s important to understand local tax requirements and how they intersect with state tax requirements. Mosey can help you keep the process streamlined and automate opening the right local payroll tax accounts at the right time.

Our compliance automation platform helps employers manage local and state compliance issues, like tax compliance concerns.

Let Mosey keep track of the details while you’re focused on running your business. Schedule a demo with Mosey to learn how we can help you quickly and efficiently manage state and local tax requirements.

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