Local income taxes are imposed by local governments, such as cities, counties, or school districts. They are used to fund various locally provided services, such as schools, parks, social services, law enforcement, transportation, and community-improvement programs.
Which states have a local income tax?
As of this writing, local income tax is imposed in these 17 states:
- Alabama
- California
- Colorado
- Delaware
- Indiana
- Iowa
- Kansas
- Kentucky
- Maryland
- Michigan
- Missouri
- New Jersey
- New York
- Ohio
- Oregon
- Pennsylvania
- West Virginia
In most of these states, local income tax is imposed only on earned income. Kansas is an exception because it charges local income tax on interest and dividend income, not on earned income.
Some states have a heavier concentration of local income tax than do others. For example, all counties in Maryland and Indiana charge local income tax, and so do many municipalities in Ohio, Pennsylvania, Kentucky, and Michigan. But in California, only San Francisco charges local tax on earned income; and in New Jersey, only Newark has a local income tax.
Who pays local income tax?
Local income taxes are typically paid by employees who work or live in the jurisdiction where the tax is levied. A few locations — such as San Francisco, Newark, and TriMet/LTD districts in Oregon — impose local payroll taxes on employers.
How is local income tax calculated?
In some jurisdictions, employee-paid local income tax is calculated as a percentage of taxable wages; for example, 2% of taxable wages. Some localities use progressive local income tax rates, meaning the taxation rate rises as the income level increases. In other cases, a flat dollar amount applies — for example, $2 or $3 per week — regardless of income level.
Calculations vary by location, as well, for employer-paid local income taxes.
What about employees who work and live in different localities?
Generally, employers must withhold local income tax based on the employee's work location. Complications can arise, however, if the employee works and lives in different jurisdictions that each have their own local income tax. Although employers normally aren't required to withhold taxes for an employee's home jurisdiction, you can do so as a courtesy to the employee.
To ensure accurate withholding, you'll need to examine the local income tax laws for both jurisdictions.
How can I learn more about local income taxes?
If you're not sure whether you or your employees are subject to local income tax, contact your payroll service provider, your local tax assessor, or the state taxation agency.
Although local income taxes are levied by the local government, some state taxation agencies collect/administer local income taxes (as a convenience) for local governments. Information on local income taxes — including how to withhold, pay, and report them — usually can be found on the state taxation agency's website.
Finally, keep in mind that local income tax rules and amounts can change quickly, so check the ones in your area regularly. Work closely with a qualified payroll service and other financial professionals.
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