Business tax planning can be complicated. It’s particularly involved for employers with multi-state payroll, who need to figure out withholding obligations in every state where they employ workers.
If you do business or employ workers in one of the 15 states that allow local jurisdictions to impose income taxes, you might also need to withhold and remit local income taxes where your employees live, work, or both.
What is local income tax?
Local income tax is a type of income tax levied by a local tax jurisdiction, such as a town, city, county, or school district.
Local income tax rates are frequently lower than federal or state income tax rates. Proceeds fund public services, programming, and infrastructure in the taxing jurisdiction, including the following project types:
- Police departments
- Fire departments
- Education systems
- Public healthcare systems
- Garbage collection services
- Road maintenance and repair
Types of local taxes
There are multiple types of local taxes. Here’s an overview.
- County. Individual counties can also impose income taxes. As an example, all 92 counties in Indiana impose local income taxes at rates between 1% and 2.864% of earned income.
- City. Income tax imposed by a city is known as “city income taxes.” As an example, New York City income taxes vary from 3.078% to 3.876%.
- School district. School district taxes fund public educational systems in a particular jurisdiction. As an example, Ohio allows school districts to impose local income taxes with public approval. This tax applies only to residents, not to individuals who work in the jurisdiction. As of 2023, 210 school districts in Ohio impose an income tax.
Do you pay local income tax where you live or work?
Local income tax is usually based on where a taxpayer lives, but in some cases, taxpayers also owe local income tax based on where they perform work (for example, if they commute). You may have withholding obligations based on where your company does business or based on where your employees perform work. Consult your business tax professional for guidance based on your company’s specific situation.
Here are two state-specific examples.
Ohio requires employers to withhold local income taxes in the jurisdiction where work is performed and allows employers to also withhold local income taxes in the jurisdiction of employee residence at the employee’s request. In many cases, employees can apply a credit for local income taxes paid to the work location jurisdiction, to reduce the amount of tax due to the jurisdiction of residence. If an employee’s resident school district imposes a school district tax, the employee may owe those taxes as well.
As an example, Columbus applies a local income tax rate of 2.5%, and Phillipsburg applies a local income tax rate of 1.5%. If you have an employee who lives in Columbus and works in Phillipsburg, the following requirements may apply:
- The company withholds local income taxes in Phillipsburg at a rate of 1.5%
- The employee owes taxes in Columbus at the higher rate of 2.5%
- Columbus allows a 100% credit for taxes paid to another jurisdiction, so the employee’s net obligation to the City of Columbus would be 1% of earned income
- The employee’s total liability to both jurisdictions is 2.5%
In this scenario, your employee might request that you withhold the additional 1% from their paycheck or pay the remainder themselves as part of their annual tax return.
If an employee lives in one taxing jurisdiction and works in another, Pennsylvania requires employers to withhold the higher of the two tax rates and remit taxes in the jurisdiction where work is performed.
As an example, Duquesne has a nonresident local income tax rate of 0.8% and a resident tax rate of 2.3%, and Pittsburgh taxes both residents and nonresidents at 1%. If an employee lives in Duquesne and works in Pittsburgh, the highest applicable tax rate is the Duquesne resident rate of 2.3%, so you’ll withhold 2.3% and remit it in Pittsburgh, which is where the work site is located.
If this employee lives in Pittsburgh and works in Duquesne, the highest applicable tax rate is the 1% resident rate applied in Pittsburgh. You’ll withhold and remit this amount to the Duqesne tax collector.
How to comply with local income tax requirements
Filing processes vary by state and taxing jurisdiction. Follow these basic steps to comply.
1. Determine your tax obligations
Check with state and local governments in each jurisdiction where an employee works or lives to determine your local tax obligations, including filing deadlines, tax rates, and tax withholding requirements. Your business’s tax professional can help you navigate these requirements, as can Mosey’s compliance platform, which identifies and alerts you of local tax requirements that apply to your company based on your payroll data. You can also automate opening the right set of local accounts through Mosey to comply with all state and local payroll tax requirements for your business.
2. Establish a withholding plan
Determine which taxes you’ll withhold from employee paychecks. Some jurisdictions have a convenience withholding rule, which allows but doesn’t require employers to withhold certain taxes from employee paychecks.
As an example, Detroit, MI requires residents of Detroit and people who earn income in Detroit to pay Detroit income tax. They also require employers doing business in the city to withhold local income tax from employee wages. Employers that are not required to withhold Detroit income tax may register and withhold for the convenience of employees who live or work in the city.
3. Register with localities
Before you can remit local taxes, you’ll need to register in each jurisdiction where you’ll owe. In many cases, businesses can register and file taxes online.
4. Withhold and remit taxes
Withhold taxes as determined by your withholding plan and remit them to the relevant local tax jurisdiction, either by filing online or by submitting a paper return and payment.
States with local income tax
The United States tax system allows federal, state, and local governments to impose income tax on individual earnings. As of 2023, 15 states allow taxing jurisdictions to impose local income taxes.
If you employ workers in any of the following states, you may be responsible for withholding and remitting local income taxes:
- New Jersey
- New York
- West Virginia
Overwhelmed by multi-state income tax complexities? Mosey can help. Mosey’s compliance platform automates the process of registering for payroll accounts in new states. Connect your payroll data directly to our platform to track compliance with withholding requirements in every state and local jurisdiction—and get notified when it’s time to take action. Want to learn more? Schedule a demo—our team is excited to meet you.
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