What is local income tax?
Local income tax is a tax imposed by cities, counties, or municipalities on employees' wages or businesses operating within a specific locality. Unlike federal and state income taxes, local income tax rules vary widely depending on your business and employees' location.
Not every city or county levies a local income tax, but for those that do, employers are responsible for withholding and remitting it from employee paychecks.
Where do businesses need to withhold local income tax?
Some states have widespread local income tax requirements, including:
- Pennsylvania – Nearly all municipalities impose a local income tax.
- Ohio – Cities and school districts have separate tax rates.
- New York City – Residents pay an additional city income tax.
- Kentucky – Many counties and school districts require local tax withholding.
- Maryland – Local tax rates apply at the county level.
If your business has employees in multiple locations, Homebase payroll helps ensure you apply the correct local tax rate for each jurisdiction.
How does local income tax affect payroll?
If your business operates in a locality with income tax, you must:
- Withhold the correct local tax rate from employee wages.
- File and remit payments to the appropriate local tax authority.
- Ensure compliance with multi-jurisdiction tax laws if employees work in multiple locations.
The exact withholding amount depends on where the employee lives and works, meaning some businesses may need to manage multiple local tax rates.
How to find local income tax rates
Employers can determine the correct local tax rates by:
- Checking with their state’s Department of Revenue, which often provides local tax tables.
- Consulting local tax authorities for up-to-date withholding requirements.
- Using Homebase payroll automates tax calculations and ensures accurate withholdings.
What happens if local income tax isn’t withheld correctly?
Mistakes in local tax withholding can result in:
- Penalties and interest from tax authorities for incorrect or late payments.
- Tax liabilities for employees, who may owe additional taxes if withholdings are incorrect.
- Compliance risks if businesses fail to track local tax obligations correctly.
Homebase payroll eliminates guesswork by automatically calculating and withholding the correct local taxes, reducing the risk of costly errors.
Make local tax compliance effortless with Homebase
Keeping up with local tax laws, withholding rules, and filing deadlines can be challenging, especially for businesses with employees in multiple locations. Homebase payroll simplifies local income tax management by:
- Automatically calculating and withholding the right local taxes.
- Filing tax payments on time to prevent penalties.
- Keeping up with changing tax rates and regulations.
- Generating payroll reports for compliance and record-keeping.
Sign up for Homebase and let us handle local tax compliance—so you can focus on growing your business.