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Your Guide to Local Income Taxes

 

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 local income tax?
As of this writing, local income tax is imposed in these 17 states:

  1. Alabama
  2. California
  3. Colorado
  4. Delaware
  5. Indiana
  6. Iowa 
  7. Kansas
  8. Kentucky
  9. Maryland
  10. Michigan
  11. Missouri
  12. New Jersey
  13. New York
  14. Ohio
  15. Oregon
  16. Pennsylvania
  17. West Virginia

In most of these states, local income tax is imposed only on earned income. Kansas is an exception in that 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 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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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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