What are Local Taxes?

A local tax is a tax imposed by a city, county, or school district in addition to federal and state taxes. These taxes fund local programs and services like schools, transportation, and public safety. Because these rules change depending on where your employees live and work, 7shifts Payroll helps you stay on top of these requirements so your team stays paid and your business stays compliant!

Things to know

• Local tax requirements are determined by the specific jurisdiction of the employee's work and residence locations.
• The obligation to pay local taxes may fall on the employer, the employee, or both.
• 7shifts Payroll processes local taxes in line with jurisdictional guidance to ensure accuracy.

Employer vs. employee local tax responsibilities

The responsibility for local taxes varies by location and business activity. This ensures that the right contributions are made to the right communities!

Employer-paid local taxes

Some jurisdictions require employers to pay payroll-based local taxes tied to business activity or total payroll expense.

• Washington, D.C. imposes a payroll tax on employers with payrolls exceeding a certain threshold based on gross receipts.
• Oregon Bureau of Labor and Industries (BOLI) requires certain employers to pay a payroll tax to fund the state's family leave insurance program.
• New York City may require employers to pay local taxes such as the Metropolitan Commuter Transportation Mobility Tax (MCTMT).

Employee-paid local taxes

In many municipalities, local income taxes are withheld directly from employee paychecks.

• Philadelphia and other Pennsylvania municipalities impose a wage tax on residents and non-residents working in the city.
• New York City residents are subject to the NYC Income Tax in addition to state income tax.
• Ohio cities like Cincinnati, Cleveland, and Columbus levy local income taxes based on income earned by residents or non-residents working within city limits.

How local taxes are calculated

Each jurisdiction determines its own calculation method to ensure local services are funded effectively.

• A flat percentage rate is a fixed percentage applied to an employee’s taxable wages across all income levels.
• Flat dollar amounts are fixed amounts withheld per pay period or monthly once minimum earnings thresholds are met.
• A fixed annual dollar amount is a set yearly tax amount divided and withheld across pay periods.
• A progressive rate applies a variable percentage that increases based on the employee’s income level.

Pennsylvania local taxes

Pennsylvania has one of the most complex local tax structures in the U.S. We help simplify this by ensuring your team's residence and work locations are correctly mapped!

Main Pennsylvania local tax types

• Earned Income Tax (EIT) is a tax on income earned by residents and non-residents working in a municipality.
• Local Services Tax (LST) is a flat-rate tax imposed on individuals working in certain municipalities.
• School District Tax (SD LST) is a tax levied specifically by the local school district rather than the municipality.

Tax collectors in Pennsylvania

To simplify administration, Pennsylvania uses regional Tax Collectors to manage multiple individual districts. 7shifts Payroll uses this structure so you can:

• Apply for tax IDs through a limited number of Tax Collectors.
• File returns through those specific collectors.
• Remit taxes to a central point rather than dealing with hundreds of individual agencies.

How Pennsylvania local taxes appear in payroll

The EIT structure is primarily a resident tax, but it is remitted to the workplace tax collector.

• The EIT withholding shown on an employee pay stub typically reflects the work location tax rate.
• 7shifts Payroll reports PSD codes for both resident and work localities to the tax collector.
• The workplace tax collector is responsible for transferring funds to the employee's residential tax district.

Local taxes on Form W-2

Local taxes withheld from wages are reported annually to employees on their W-2 Form.

• Local wages are reported in Box 18.
• Local tax withheld is reported in Box 19.
• The name of the locality is reported in Box 20.