Local payroll taxes by state exist in roughly a dozen states, where cities, counties, school districts, and transit authorities are authorized to tax wages on top of federal and state withholding. About 5,000 local jurisdictions across the country impose some form of income or payroll tax, with rates that run from a few dollars per year to nearly 4% of gross wages depending on where the work is performed. Every jurisdiction sets its own rate, registration process, and filing schedule independently, which is why a business operating in more than one location can end up with dozens of separate withholding obligations.
Where Local Payroll Taxes Apply
Most states don’t allow local wage taxation at all. The states below are the ones that do, and the systems differ enough that it’s worth knowing which model you’re dealing with before you set up payroll.
Pennsylvania
Pennsylvania has thousands of municipalities and school districts that levy a local Earned Income Tax, and both the municipality and the school district where a worker lives can impose separate EIT rates that stack. Employers with any worksite in the state must withhold and remit both the EIT and a Local Services Tax on behalf of their employees.1Pennsylvania Department of Community and Economic Development. Local Income Tax Information The LST is capped at $52 per year across all jurisdictions a worker performs services in.2Pennsylvania Department of Community and Economic Development. Local Services Tax
Ohio
Ohio authorizes any municipality to levy an income tax on wages earned within its borders. Rates above 1% require voter approval.3Ohio Legislative Service Commission. Ohio Revised Code Section 718.04 – Authority for Tax on Income and Withholding Tax More than 200 Ohio school districts add their own income taxes on top of that. Ohio municipalities have no reciprocity agreements with each other, so a worker who lives in one Ohio city and commutes to another can face withholding in both, with only a partial credit available.
Kentucky
Kentucky cities and counties impose occupational license taxes calculated as a percentage of wages earned within their boundaries. In counties with populations above 300,000, the rate caps at 1.25% of salaries, wages, and commissions.4Kentucky Legislative Research Commission. Kentucky Code 68.180 – Occupational License Tax in Counties Containing 300,000 Population
Alabama
Roughly 25 Alabama cities levy occupational taxes on wages, with rates from 0.5% in smaller towns to 2% in cities like Birmingham, Gadsden, and Tuskegee.
Maryland
Every Maryland county sets a county income tax rate between 2.25% and 3.30% of state-adjusted gross income, applied to residents rather than to the work location.5Maryland General Assembly. Maryland Code Tax – General 10-106 – County Income Tax
Indiana
All 92 Indiana counties impose a county income tax, with rates currently ranging from 0.5% to 3%.6Indiana Department of Revenue. 2025 Indiana County Income Tax Rates and County Codes As in Maryland, employers withhold based on where the employee lives, not where the office sits.
Michigan
About 24 Michigan cities impose a local income tax under the state’s City Income Tax Act. Resident rates typically run 1% of wages, with nonresidents paying half. Detroit is the outlier at 2.4% for residents and 1.2% for nonresidents.7City of Grand Rapids, Michigan. Other Michigan Cities with Income Tax
Missouri
Kansas City and St. Louis each impose a 1% earnings tax on anyone who works within city limits.8City of St. Louis. U.S. Cities That Levy Income (Earnings) Taxes
Colorado
Several Colorado municipalities levy Occupational Privilege Taxes, also called head taxes. Denver charges $5.75 per month per employee earning at least $500 in a calendar month, plus a $4.00 monthly employer share.9City and County of Denver. Tax Guide Topic No. 61 Occupational Privilege Taxes Glendale imposes $5 per month on employees earning more than $750, matched by $5 from the employer.10City of Glendale, CO. Occupational Privilege Tax An employee working for different employers in two OPT jurisdictions owes the tax in each one if they meet the threshold in both.
Delaware, New Jersey, and New York
Wilmington, Delaware collects a city wage tax of 1.25% on the gross wages of anyone who lives or works within the city.11New Castle County. City of Wilmington Wage Tax Information Newark, New Jersey levies a 1% payroll tax on wages for services performed within city limits, including employees supervised from Newark or primarily reporting to a Newark location.12Newark, NJ. Payroll Tax New York City imposes a personal income tax on residents at graduated rates from 3.078% to 3.876%, administered by the state Department of Taxation and Finance.13NYC Comptroller. The NYC Personal Income Tax Before and After the Pandemic
Oregon and West Virginia
Oregon’s TriMet transit district taxes gross wages at 0.8237% for services performed within the Portland metro area. This is an employer-paid tax rather than an employee withholding.14TriMet. Payroll and Self-Employment Tax Information The Oregon Department of Revenue administers it directly.15Oregon Department of Revenue. TriMet Transit Payroll Tax In West Virginia, Huntington and other cities charge a flat $5 per week city service fee on anyone working in city limits, regardless of hours.16City of Huntington. City Service Fee
Three Types of Local Payroll Tax
The withholding mechanics differ by tax type, and the type matters more than the label a jurisdiction happens to use.
Percentage-based earned income taxes are the most common. A flat percentage of gross wages, typically 0.5% to about 3%, is withheld from each paycheck. Pennsylvania municipalities, Ohio cities, Michigan cities, and Maryland and Indiana counties all use this model. In Pennsylvania, both the municipality and the school district where a worker lives may each impose a separate EIT rate, and the total local tax is the sum.17Pennsylvania Department of Community and Economic Development. PSD Codes and EIT Rates
Flat-fee assessments charge a fixed dollar amount instead of a percentage. Pennsylvania’s LST is annual and capped at $52. Colorado OPTs are monthly. West Virginia city service fees are weekly. Because the dollar amount doesn’t scale with income, these fixed taxes hit lower-wage workers proportionally harder.
Employer-paid transit taxes come out of the employer’s payroll expense rather than employee wages. Oregon’s TriMet tax is the clearest example. Nothing appears on the employee’s pay stub, but the filing and payment obligation is just as enforceable as any withheld tax.
Which Jurisdiction Gets to Tax the Wages
Most local income taxes are imposed by the jurisdiction where the work happens. If you commute from a suburb into a city that levies a local tax, the city taxes your wages whether you live there or not. But the home municipality often wants a share too, particularly in Pennsylvania and Ohio, where nearly every locality has its own tax.
In Pennsylvania, employers compare the employee’s total resident EIT rate against the work location’s nonresident rate and withhold at whichever is higher.18Pennsylvania Department of Community and Economic Development. Local Withholding Tax FAQs Michigan takes a different approach: residents pay the full city rate and nonresidents pay half.7City of Grand Rapids, Michigan. Other Michigan Cities with Income Tax Maryland and Indiana bypass the work location entirely and tax based on residence.
State-level reciprocity agreements sometimes let cross-border commuters pay tax only to their home state. At the local level, these agreements are much rarer. Ohio cities offer only a partial credit for taxes paid to the work city against the home city, and if the rates differ the credit may not zero out the second bill.
Remote and Hybrid Work
Remote work has turned local payroll tax compliance into a problem that barely existed a decade ago. When employees split time between a home office in one jurisdiction and a company office in another, the question of which locality can tax those wages often has no clean answer.
Several states apply a “convenience of the employer” rule that lets the employer’s state tax wages even when the employee works from another location. If you telecommute from home for your own convenience rather than because your employer requires it, the income is treated as if earned at the office. States enforcing some version of this rule include New York, Pennsylvania, Delaware, Nebraska, Alabama, Connecticut, New Jersey, and Oregon.19New Jersey Department of the Treasury. New Jersey Division of Taxation – Convenience of the Employer Sourcing Rule FAQ
At the local level the problem compounds. An employee who works three days a week in a downtown Ohio office and two days from home in a different city arguably owes local tax to both municipalities. Ohio has no standardized method for apportioning those wages, which leaves employers to track physical work locations day by day or risk withholding for the wrong jurisdiction. Hybrid arrangements are one of the most common audit triggers for businesses with local tax exposure.
What Employers Need to Do
Setting up local payroll tax withholding correctly at the outset saves substantial trouble later. A few requirements come up in almost every jurisdiction.
Register Before You Withhold
You need to register with the local tax collector or collection agency before withholding any local tax. This is separate from your federal EIN and state tax registration. In Pennsylvania, Act 32 consolidated collection into county-based Tax Collection Districts, so you register with the designated collector for the county where your worksite sits rather than with each municipality.1Pennsylvania Department of Community and Economic Development. Local Income Tax Information Ohio cities each handle their own registration. Failing to register in a jurisdiction where you have employees is one of the fastest ways to trigger enforcement, because W-2 data and state-level quarterly wage reports let the jurisdiction identify your presence on its own.
Identify the Correct Jurisdiction for Each Employee
In Pennsylvania, every municipality and school district has a six-digit Political Subdivision Code that determines which rates apply. Sending money under the wrong PSD code creates a reconciliation problem at year-end.17Pennsylvania Department of Community and Economic Development. PSD Codes and EIT Rates Pennsylvania offers an online address lookup for both residence and work location. Other states use different identifiers, but the principle holds: each employee has to be matched to the exact jurisdictions that apply to them.
Collect Withholding Certificates and Exemptions
Employees typically complete a local withholding certificate showing home address, work location, and any exemptions they qualify for. In Pennsylvania, employees earning less than $12,000 per year from all sources can claim an exemption from the Local Services Tax by filing a certificate with both the employer and the local collector.20Pennsylvania Department of Community and Economic Development. Local Services Tax – Exemption Certificate Until the employer receives that certificate, they must withhold the LST. Keep the forms on file for several years; auditors will ask for them.
Filing Schedules, Penalties, and Audit Triggers
Most local taxing authorities require monthly or quarterly filings, though schedules vary by jurisdiction and sometimes by the size of the payroll liability. Smaller employers can qualify for annual reporting in some places when withholding falls below a set threshold. Pennsylvania’s county-based collectors accept payments through centralized online portals covering multiple municipalities at once.
Late filing and late payment penalties are typically a percentage of the unpaid balance that grows the longer you wait, plus interest running roughly 7% to 11% annually depending on the jurisdiction. The bigger risk is often the audit that follows late or inconsistent filings. Year-end reconciliation matches the total withheld from all employees against the individual W-2 totals reported for each one, and mismatches draw scrutiny quickly.
Local tax audits are rarely random. Auditors work from data, and a few patterns consistently attract attention:
- Large, unexplained swings in the amount remitted between quarters or years.
- W-2 totals that don’t match quarterly filings or the amounts actually remitted, which is especially common when a business switches payroll providers mid-year.
- Documented payroll activity in a jurisdiction where the business has no active registration, which happens frequently when companies add remote employees without updating filings.
- Manual jurisdiction mapping in spreadsheets rather than automated payroll systems, which produces mapping errors at a higher rate in dense local tax states like Pennsylvania and Ohio.
The best protection is unglamorous: register everywhere you have a withholding obligation, file on time, and make sure quarterly numbers tie to W-2 totals at year-end. Businesses that struggle most with local payroll tax compliance are the ones that set it up correctly for their original office and never revisited it as they hired in new locations.