Local taxes: A complete guide for US employers

As an employer in the US, you are responsible for withholding and remitting your employees’ payroll taxes at the federal and state level.

But in some locations, employees are also taxed at a local level. If you have team members in cities like New York, Philadelphia, or Columbus, for instance, you’ll likely need to calculate, withhold, and remit additional contributions. Understanding these obligations can be difficult — especially if you have employees in multiple locations.

In this article, we’ll break down what your responsibilities are as an employer, and show you how to simplify the entire process, saving you time, resources, and potential fines and penalties. So let’s jump straight in.

What are local taxes?

Local taxes are additional payroll taxes imposed by a local government, usually at the city, county, municipality, or school district level. These are typically applied on top of federal and state taxes.

They are generally used to fund local amenities, like public schools, local transit, or city services.

It’s important to note that only states with state income taxes have local taxes. For example, in Texas and Florida — where there are no state income taxes — there are no local taxes either.

At the same time, just because a state imposes state income taxes, this doesn’t mean that localities have to impose local taxes as well. In fact, local authorities must get permission from the state to do so.

What is a city tax?

A city tax is simply one type of local tax, and is generally used to fund city-specific services and public projects. Not every conurbation has one, but many larger cities — such as New York City, Philadelphia, and Detroit — do.

What’s the difference between local taxes and state taxes?

Local taxes are not a replacement for state taxes, or vice versa. Local taxes are only applicable to employees in certain cities, counties, or municipalities, whereas state taxes apply across the entire state.

For instance, if you have an employee in New York City, you may need to withhold all of the following:

• Federal taxes: Federal income tax, FUTA tax, FICA taxes

• State taxes: State income tax, SUTA tax

• Local taxes: New York City income tax

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Do remote workers pay local taxes?

Yes. If you have an employee living and working remotely in a locality that imposes local income tax, they will need to pay that tax — even if your business is based elsewhere.

Do contractors pay local taxes?

Yes. Like remote workers, contractors living and working in a locality that imposes local income tax must pay. However, as an independent contractor, they are fully responsible for calculating, reporting, and paying these taxes themselves.

Finally, why should you, as an employer, care?

As mentioned, it’s your responsibility to know about these taxes, and withhold and remit them accordingly. If you don’t, you can face penalties, fines, and legal action, as well as friction with your affected employees.

How does local income tax work?

Unlike federal and even state income taxes, local income taxes vary wildly by location. They can be:

• Flat-rate. A set percentage amount, regardless of the level of income.

• Progressive. A dynamic percentage amount that rises based on the employee’s level of income.

• Flat dollar amount. A set dollar amount, regardless of the level of income (e.g., $3 per week).

Local taxes can also apply based on where someone works and/or where they live. For instance, if an employee lives in one locality and works in another, both local income taxes may apply. In some states, you’d need to withhold for both locations, while in others (such as Pennsylvania), you’d need to withhold for the higher rate.

In some states (such as Ohio), you're required to withhold local income tax for the work location. However, as the employer, you can choose to also withhold for the employee’s city of residence — even if it’s not required. This can potentially help your employees to avoid owing taxes when they file.

Who pays local taxes?

Some local taxes are paid by the employee (withholding taxes); some by you (employer taxes); and some by both. In this way, they are similar to federal payroll taxes, such as Social Security and Medicare.

Remember, though, that wherever the money comes from, it’s still your responsibility as the employer to withhold and remit it.

US states with local income taxes

As mentioned, local taxes are only applicable in states that have a state income tax. Currently, this includes the following states:

Note that, even though Arkansas has state income taxes, no localities collect local taxes.

To see a full breakdown of your tax withholding obligations by state, check out our free US State Explorer tool:

How does local taxation affect payroll?

When running payroll, local income tax adds another layer of complexity. As well as being aware of what is required, calculating it correctly, and staying on top of any law changes, you need to account for:

• Withholding requirements. You must determine whether to withhold based on residency, work location, or both.

• Tax forms. Your W-2s must reflect local tax withholdings (often in Box 18-20). Learn more about payroll tax forms.

• Multiple jurisdictions. Some employees might trigger filings in several localities.

And it's not just about taking money out of a paycheck, either. You also need to:

• File regular returns (monthly or quarterly)

• Send payments on time

• Stay on top of regulatory changes

Even small details like your employees’ address is critical. One small typo in a team member’s ZIP code can lead to withholding for the wrong jurisdiction, resulting in incorrect pay for them, and potential penalties for you. 

How can Remote help?

If this sounds like a lot of work and stress, here’s the good news: Remote Payroll does all of this for you in the US.

Specifically, we:

• Automatically calculate all federal, state, and local taxes for each of your employees

• File all the relevant tax returns — including local ones — with the correct agencies

• Remit all tax payments on your behalf

• Submit year-end filings (including W-2s) with all the right local information

• Ensure full compliance with all federal, state, and local payroll tax laws — even as they change

Your employees can even access their tax documents directly through Remote’s self-serve portal; there’s no requests, no resource drain, and no waiting.

Whether your employee is working from Manhattan or Middletown, our platform ensures every local tax obligation is handled on your behalf — accurately, on time, and without the stress. To learn more, speak to one of our friendly experts today.

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