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Besides dealing with federal and state payroll taxes, employers in some areas are also responsible for local taxes. These are taxes imposed by local authorities such as cities, counties, and school districts.
What kinds of local taxes are there?
Local taxes can include sales, property, and other taxes. As an employer, what you need to know about are the local income taxes, sometimes called “local wage taxes” or “local payroll taxes”. These apply to people who live or work in a given area (or both). The tax rate may vary depending on whether the employee is also a resident.
Who pays these local taxes? How are local taxes paid?
Either the employee or employer pays any local taxes due. Local taxes are typically paid through payroll.
Local taxes can also be calculated by different methods:
- As a percentage of salary or wages. For example, Wilmington, Delaware, currently takes 1.25% of gross wages.
- As a percentage of federal or state taxes. School districts in Iowa assess a percentage of the amount owed in state income taxes.
- As a flat amount. For instance, three counties in West Virginia assess $5 – $10 per pay period from employee salaries.
How do I know if local taxes apply in my area?
Most US cities and counties don’t have local income taxes. In fact, fewer than 20 states have localities that impose them. The practice is most common in Iowa, Indiana, Maryland, Ohio, and Pennsylvania. Note that some areas have exemptions, such as those for low-income taxpayers.
To see if local taxes apply in your area, start with the relevant state agency. This may be the state department of taxation, revenue, or economic development. You can also check with your city or county’s taxation division.