What are Local Taxes?

In the United States, various local jurisdictions—including cities, counties, and school districts—may impose a local income tax. These taxes are used to fund local government programs and services and may be required to be paid by either the employer or the employee, depending on the locality.

In addition to federal and state income taxes, some municipalities impose their own income tax. Employees working in these areas may have local income taxes withheld from their paychecks.

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Employer vs. Employee Local Taxes

Some localities require employers to pay taxes on behalf of their employees, while others require employees to have local income tax withheld from their wages.

Employer-Paid Local Taxes

• Washington, D.C. – Employers exceeding a certain payroll threshold must pay a payroll tax based on their gross receipts and payroll expenses within Washington, D.C.
• Oregon Bureau of Labor and Industries (BOLI) – Certain employers pay a small payroll tax to fund the Oregon Family Leave Act (OFLA), which provides wage replacement benefits for eligible employees taking family leave.
• New York City – Employers may be required to pay local taxes such as the Metropolitan Commuter Transportation Mobility Tax (MCTMT).

Employee-Paid Local Taxes

• Pennsylvania – Cities like Philadelphia impose a wage tax on all salaries, wages, and compensation earned by residents or non-residents working within the city. Other Pennsylvania municipalities also impose local income taxes.
• New York City – The NYC Income Tax applies in addition to New York State income tax for employees working in the city.
• Ohio – Many cities, including Cincinnati, Cleveland, and Columbus, levy local income taxes on residents and non-residents who work within the city limits.

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How Local Taxes Are Calculated

Each local jurisdiction calculates taxes differently. The most common methods include:

1. Flat Percentage Rate – A fixed percentage of an employee’s taxable wages.
2. Flat Dollar Amount per Pay Period – A fixed amount deducted per paycheck or per month once an employee earns a minimum amount.
3. Fixed Annual Dollar Amount – A set dollar amount deducted across the year.
4. Progressive Tax Rate – A variable percentage applied based on the employee’s income level.

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Pennsylvania Local Taxes

Pennsylvania has a complex local tax structure, requiring employers to withhold multiple taxes, including:

Types of Pennsylvania Local Taxes

1. Earned Income Tax (EIT) – A tax on income earned by residents of a municipality and non-residents working in that municipality.
2. Municipal Local Services Tax (LST) – A flat-rate tax imposed on individuals working in certain municipalities.
3. School District Tax (SD LST) – A tax levied by school districts rather than municipalities.

Tax Collectors & Filing Responsibilities

Applying for tax accounts in hundreds of Pennsylvania localities can be complex. To simplify the process, Pennsylvania assigns Tax Collectors to manage multiple districts. This allows employers to file and remit taxes through a small number of Tax Collectors rather than dealing with each individual locality.

How Local Taxes Appear in Payroll

• EIT is primarily a resident tax but is remitted to the employer’s workplace tax collector.
• The EIT withholding shown on an employee’s pay stub will reflect the work location’s tax rather than the employee’s residential tax.
• When filing the EIT return, both workplace and residential PSD (Political Subdivision) codes are reported, and the workplace tax collector transfers the necessary funds to the employee’s residential tax district.

While this system can be complex, Homebase processes payroll according to Pennsylvania’s tax rules. Some payroll providers may calculate local taxes differently, which can create variations in employee experiences.

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Common FAQs

Are local taxes reported on the W-2?

Yes. Local taxes withheld from employees’ wages will appear on Form W-2:

• Box 18 – Local wages
• Box 19 – Local tax withheld
• Box 20 – Name of the locality

Which local taxes does Homebase calculate, file, and remit?

Employers should review:

• Tax Forms Filed by Homebase