To calculate local income tax, multiply your locally taxable income by the tax rate your city, county, or school district charges, then subtract any tax your employer already withheld and any credit you’re entitled to for tax paid to another locality. Most jurisdictions use a flat rate, so the core math is a single line. The work is in confirming which locality claims you, what income it actually taxes, and whether more than one rate is in play.
Do You Actually Owe a Local Income Tax
Around 16 states authorize some form of local income tax. The heaviest concentration is in the Midwest and Mid-Atlantic, with Ohio, Pennsylvania, Indiana, Kentucky, Maryland, and Michigan giving broad taxing power to cities, counties, or school districts. A handful of other states limit the tax to specific cities, and most states have no local income tax at all.
Where these taxes exist, your obligation usually turns on two things: where you live and where you work. Most jurisdictions tax residents on all earned income no matter where it was earned. Many also tax nonresidents on income earned inside city or county limits. Some areas layer a school district income tax on top of a municipal tax, and school district tax is based only on where you live.
If you’re not sure which districts apply to your address, most state departments of revenue publish an official address-lookup tool that matches your home address to the specific municipality, county, and school district that can tax you, along with the current rates. Using that tool prevents filing with the wrong collector or applying the wrong rate.
Pull the Numbers Off Your W-2
If you’re an employee, three boxes on your W-2 carry everything you need:
- Box 18 shows total wages subject to local income tax.
- Box 19 shows the local income tax your employer already withheld during the year.
- Box 20 names the locality where that withheld tax was paid.
If you worked in more than one taxing locality during the year, your W-2 may carry multiple entries, one for each place.1Internal Revenue Service. W-2, Wage and Tax Statement Keep the local return form itself handy too. Most cities post it on their tax department’s website, or on the site of the regional collection agency the municipality uses. Your federal return is useful as well, because some localities reference federal adjusted gross income or federal schedules when defining what counts as taxable at the local level.
What Income Counts
Local income taxes almost universally apply to earned income: wages, salaries, bonuses, commissions, and tips. Most jurisdictions exclude unearned income like Social Security benefits, interest, dividends, and retirement distributions. This is a significant departure from federal income tax, which reaches most types of income.
The distinction matters because reporting income your locality doesn’t tax leads to overpaying. If you receive both a salary and investment income, only the salary side typically appears on your local return. Some jurisdictions also exclude workers’ compensation, certain insurance proceeds, and military pay. The instructions with your local form will spell out what to include and what to leave off.
Run the Calculation
Most local income taxes use a flat rate, so the formula is:
Local taxable income × local tax rate = total local tax liability
If your locally taxable wages are $55,000 and your municipality charges 1.5%, your total liability is $825. That’s the entire calculation for most returns. Rates in jurisdictions that levy the tax typically fall between 1% and nearly 4%.
A small number of larger cities use graduated rates, where portions of your income are taxed at increasing percentages. In that case, calculate the tax on each bracket separately and add the results, the same way federal brackets work. Your local form will include a tax table or rate schedule when graduated rates apply.
Once you have the total, compare it to Box 19 on your W-2. Three outcomes are possible:
- If withholding equals liability, you owe nothing and get nothing back. File the return as confirmation.
- If withholding is less than liability, pay the difference with your return. This is common when your employer withheld at a lower rate than your resident municipality charges.
- If withholding exceeds liability, you’re owed a refund.
Credit for Tax Paid to Your Workplace City
If you live in one taxing municipality and work in another, both may claim your income. A credit on your resident return keeps you from paying the full rate twice. Your home city usually gives you credit for tax paid to the city where you work, reducing your resident bill by what was already withheld for the workplace locality.
The credit generally equals the lesser of the two rates. If your workplace city charges 2% and your home city charges 1.5%, you owe the full 2% at work and nothing extra at home, because the workplace rate already exceeds the resident rate. Reverse it, and if home charges 2% while work charges 1%, you pay 1% to the workplace city and a 1% balance to your home city. Either way, you end up paying the higher of the two rates rather than both stacked.
The credit isn’t automatic. You claim it on your resident return, and most forms want documentation of what you paid to the other locality. Forgetting the credit is one of the most common local tax mistakes and leads to overpaying your home municipality.
If You’re Self-Employed
The W-2 approach only covers employees. If you’re self-employed and live or run a business in a jurisdiction with a local income tax, you owe tax on your net business profits. The base figure is generally your net earnings from self-employment, similar to what you report on federal Schedule C or Schedule SE.
You won’t have Box 18 or Box 19 to reference. You calculate local taxable income from your own records, apply the local rate, and pay the full amount yourself since no employer is withholding. Many jurisdictions also require self-employed taxpayers to make quarterly estimated payments during the year rather than settling up at filing time. Missing a quarterly deadline can trigger penalties even if you eventually pay in full.
Remote Work
Remote work has created real confusion about which locality can tax your income. The core question is whether the tax follows where you physically sit while working or where your employer’s office is located. Jurisdictions answer this differently, and the legal picture is still evolving.
Some cities tax based on where the work is physically performed, so a remote worker at home owes tax to the home municipality rather than the office city. Others treat the employer’s location as the taxing situs, meaning remote workers owe the office city no matter where they log in. Court cases have gone both ways, and there’s no uniform national rule.
If you work remotely across jurisdictional lines, check both your home municipality’s rules and your employer’s office municipality. You may owe in both places and need to claim credits, or only one city may have a valid claim. Getting this wrong can mean double taxation or a later bill with penalties attached.