Local Payroll Taxes

Local payroll taxes are taxes that a city, county or other local government charges on wages, and employers usually withhold them from each paycheck. They stack on top of federal and state taxes, so two employees on one payroll can see different deductions.

Payroll tax does not stop at the federal and state level. Federal income tax withholding and employer taxes follow IRS rules, but each locality sets its own tax, rate and filing process.

What Types of Local Payroll Taxes Are There?

Each state and locality chooses what to tax. These three examples from state agency pages show the range.

• Earned income tax: Pennsylvania municipalities apply a resident rate and a nonresident rate to wages.
• Flat annual tax: Pennsylvania's Local Services Tax is limited to $52 per taxpayer in a calendar year.
• City resident tax: New York City income tax is withheld for city residents.

Rates change, so confirm current figures with your local tax collector.

Who Withholds Local Payroll Taxes?

The employer withholds, and its duty follows its worksites. In Pennsylvania, DCED says the rate to withhold is always the higher of the employee's resident rate or the work location's nonresident rate, so both addresses matter.

Residence can drive the duty too. New York requires employers with an office or business in the state to withhold for New York City residents. Oregon requires employers to withhold its statewide transit tax for residents wherever they work and for nonresidents who work in Oregon.

How Do Remote and Hybrid Work Complicate Local Taxes?

A home office can create a new taxable worksite. DCED lists residences of home-based employees as worksites, and employers must register with that municipality's tax collector.

Short assignments add a test. In Pennsylvania, a job location held under 90 consecutive days is measured against the employer's permanent office, while 90 or more consecutive days uses the job location.

Track each employee's home address and work location, and update both when either changes. See remote work policy compliance for more.

How Do Local Taxes Appear on Pay Stubs and W-2s?

Show each local tax as its own deduction line, named for the locality, so employees can match stub totals to their year-end form. The paycheck and taxes guide explains the other lines.

On Form W-2, the IRS says boxes 15 through 20 report state and local income tax information. One form can show two states and two localities, and employers should contact the state or locality for specific reporting details.

What Mistakes Do Employers Make With Local Taxes?

Most errors come from treating local tax as a one-time setup.

• Withholding at the home rate when the work location's rate is higher.
• Continuing to withhold the Local Services Tax after an employee files an exemption certificate. DCED says employers must stop.
• Skipping returns because amounts are small. Oregon sets no minimum filing threshold.

Penalties can be steep. Oregon can assess $250 per employee, up to $25,000 per tax period, for knowingly failing to withhold the transit tax.

How Does HR Cloud Help With Local Payroll Taxes?

HR Cloud's pages do not describe local tax calculation or filing, so rates and remittance stay with your payroll provider. People HRIS keeps job and pay data in one employee record.

HR Cloud's payroll integrations send time collected in HR Cloud to your payroll vendor. Want to see it? Request a demo.

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Frequently Asked Questions

Q: Do employers pay any local payroll taxes themselves?

A: Sometimes. Oregon's DOR says TriMet and Lane transit payroll taxes are imposed on the employer, unlike the statewide transit tax, which is imposed on employee wages.

Q: Is an employee exempt from income tax withholding also exempt from local tax?

A: Not automatically. Oregon's DOR says employees with high exemptions or wages below the income tax withholding threshold are still subject to the statewide transit tax.

Q: What if the employer is based in another state?

A: New York does not require withholding for its residents from employers with no office or business in the state. DCED tells out-of-state employers who do not withhold to notify Pennsylvania residents they owe quarterly estimated payments.

Q: What if an employee worked in three localities in one year?

A: A single Form W-2 reports wages and taxes for two localities, so employers use another form for the third.

Q: How often do employers file local withholding?

A: Each locality sets its own schedule. In Oregon, transit tax returns are due each quarter, and annual filers report by January 31.

Q: Can low earners be exempt from Pennsylvania's Local Services Tax?

A: Yes. DCED says a subdivision charging more than $10 must exempt taxpayers whose earned income is under $12,000 in that subdivision.