As an employer, you’re responsible for collecting and remitting federal and state payroll taxes. And depending on where your business and employees are located, there may be another layer: local taxes. These are collected by local authorities like municipalities, counties, and school districts to fund public services.
If local taxes feel like a maze, you’re in the right place. This guide explains what local taxes are, how to know if they apply to your employee, and who's responsible for paying them, so you can handle them confidently.
Types of local taxes
Local taxes can include sales taxes, property taxes, and other taxes. As an employer running payroll, what you need to consider are local payroll taxes: the taxes that come out of employee wages and get remitted to the local taxing authority, separately from your federal and state payroll tax deposits.
Local taxes generally fall into two categories, and a single locality can impose both types of taxes at once:
Local income taxes (sometimes called "earned income taxes" or "local wage taxes"): a percentage of an employee's wages. The rate can vary depending on whether the employee lives in the taxing jurisdiction, works there, or both—many localities charge a higher rate for residents than for non-residents.
Flat local taxes (sometimes called “occupational taxes,” “occupation tax,” or “local services taxes”): a fixed dollar amount paid regardless of how much the employee earns. Pennsylvania's Local Services Tax is one example. Boroughs and school districts in Pennsylvania can charge up to $52 per year for the privilege of working there, whether or not the employee lives locally.
How to determine if local taxes are based on residency or work location
It depends on the jurisdiction. For example, employers have to determine which locality taxes apply when an employee works from home in a different city or county than the office. Local taxes can be triggered by residency, by work location, or both at the same time.
For employers, the practical takeaway is that you generally need to know both home and worksite addresses for every employee to determine which local tax rules apply—especially if you have remote workers.
How to identify applicable local taxes
To find out whether local taxes apply to your employees, start with the relevant state agency—typically the state department of taxation, revenue, or economic development. From there, check with the city or county tax office for the specific jurisdiction where each employee works and lives, since the two can have different rules.
The good news is that most US cities and counties don't have local income taxes. According to the Tax Foundation, local income taxes are imposed in only 15 to 17 states.
Ohio and Pennsylvania account for the vast majority of local taxing jurisdictions nationwide. Other states with meaningful local income tax activity include Indiana, Maryland, Iowa, Kentucky, Michigan, Missouri, New York, and a handful of others, depending on how narrowly “local income tax” is defined.
Some areas have exemptions, such as reduced or waived rates for low-income taxpayers, so simply because a jurisdiction has a local tax doesn't necessarily mean your employee owes it.
How local tax rates are calculated
How a local payroll tax rate is calculated depends entirely on your employee’s taxing jurisdiction. Local taxes can be calculated by a wide variety of different methods:
As a percentage of salary or wages. Example: Wilmington, Delaware, currently takes 1.25% of gross wages.
As a percentage of federal or state taxes. Example: Some Iowa localities levy a school district tax, which is assessed as a percentage of the amount owed in state income taxes.
As a flat amount. Example: Three cities in West Virginia assess $5 to $10 per pay period from employee salaries.
Understanding when to pay local taxes
Local tax payment frequency is set by the taxing jurisdiction, so it varies depending on where you're withholding. Quarterly withholding is the most common schedule for local income tax. Flat local taxes are usually prorated across each pay period rather than paid all at once.
Local tax schedules may not match your federal or state deposit schedule. Confirm directly with each local tax collector to make sure you’re meeting the appropriate deadlines for payroll compliance.
Is the employee or employer responsible for paying local taxes?
Like other withholdings, the employee is generally the one with the tax liability, because these are taxes assessed on their earnings and/or the privilege of working in the jurisdiction. However, if the local tax is paid through payroll, then the employer is responsible for withholding the taxes from the employee's paycheck and remitting them.
How payroll providers can handle local taxes as part of payroll
It depends on the provider. Some payroll providers only calculate and file the more common local tax, like an income tax based on a percentage of wages, and leave the rest for you to handle on your own. That gap can catch employers off guard. When you run a regular payroll with Gusto, we automatically calculate, withhold, file, and pay local taxes (as well as state and federal payroll taxes).
FAQs
What do local taxes fund?
Local taxes fund public services provided by cities, counties, and school districts: things like schools, road maintenance, public safety, parks, and public transit. Unlike federal or state income tax, revenue collected through a local tax generally stays within that specific jurisdiction rather than being redistributed more broadly.
Does my employee still owe local taxes if they work remotely for my out-of-state company?
It depends on where your employee physically performs the work, not where your company is based. Many local taxes are triggered by work location, so if your employee lives and works from home in a taxing jurisdiction, they may owe local taxes there even though you as the employer operate elsewhere. Confirm the employee's home address to determine which local rules apply.
Do all employees from the same state pay the same local tax rate?
No. Local tax rates depend on each individual employee's home and work addresses, not on the company as a whole. Two employees working for the same employer can owe different local tax amounts if they live in different municipalities, since rates and rules are set at the local level and often differ for residents versus non-residents.
Are property taxes and sales taxes also considered local taxes?
Yes, property taxes and sales taxes are both local taxes, but they work differently than a local income tax. Property tax is based on the value of real estate a person or business owns, and local sales tax is collected on purchases within a municipality's borders. As an employer, local income tax is the one you're responsible for withholding from paychecks; property and sales taxes are typically paid directly by the business or consumer, not withheld through payroll.
