The reason state wages and local wages are different on your W-2 is that each taxing jurisdiction writes its own rules for what counts as taxable pay. Box 16 reflects your state’s definition of taxable wages, Box 18 reflects your city’s or county’s definition, and those two definitions rarely agree on which deductions to allow, which types of compensation to include, or how much of your income falls within reach. A gap between the two boxes is normal.
What Box 16 and Box 18 Actually Report
Your W-2 uses Boxes 15 through 20 for state and local income tax information. Box 16 shows the portion of your pay your state treats as taxable. Box 18 shows the portion your city, county, school district, or other local jurisdiction treats as taxable. The IRS tells employers to follow each state’s and locality’s own reporting rules when filling in these boxes, which is why the numbers rarely match each other, and often don’t match Box 1 (your federal taxable wages) either.1Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
Because the IRS defers to individual jurisdictions, there is no single formula that decides what belongs in these boxes. Your employer’s payroll system runs a different set of rules for every state and locality where you owe tax. The sections below cover the reasons those calculations produce different results.
Pre-Tax Deductions Are the Most Common Cause
The biggest driver of the gap is how each jurisdiction handles pre-tax deductions, meaning money pulled from your paycheck before taxes are figured. At the federal level, contributions to a traditional 401(k) plan are excluded from taxable income for the year you make them.2Internal Revenue Service. 401(k) Resource Guide Plan Participants – 401(k) Plan Overview
Many states follow that federal approach and leave 401(k) deferrals out of Box 16. Some states, though, treat retirement contributions as taxable compensation right away, even though the federal government defers the tax until withdrawal. Your local jurisdiction may take yet a third position. When the state excludes the contribution and the locality includes it, or the reverse, Box 16 and Box 18 will differ by roughly the amount you contributed.
Section 125 Cafeteria Plans
A similar split happens with Section 125 cafeteria plans. Under federal law, money you route through a cafeteria plan for health insurance premiums, flexible spending accounts, and similar benefits is excluded from your gross income.3Office of the Law Revision Counsel. 26 U.S. Code 125 – Cafeteria Plans Most states honor that exclusion. Many local taxing authorities do not: they define their tax base as your total earned income before any of those deductions come out. When a locality uses that broader definition, Box 18 will be higher than Box 16 because those cafeteria plan dollars get added back in.
Health Savings Account Contributions
HSA contributions create another mismatch. The federal government excludes both employer and employee HSA contributions from taxable income, and most states do the same. A small number of states, most notably California and New Jersey, do not follow the federal HSA exclusion. If you live or work in one of those states, Box 16 may be higher than you expected because your HSA contributions count as taxable at the state level, even when your local jurisdiction excludes them or has no local income tax at all.
States and Localities Define Taxable Income Differently
Beyond deductions, states and localities often start from entirely different definitions of what pay is taxable in the first place. Most states calculate your tax using a figure closely tied to your federal adjusted gross income, which pulls in wages along with various other kinds of earnings. Local jurisdictions frequently use a narrower measure, typically “earned income” or “net profits,” that focuses on wages and salary and leaves out things like stock options, certain fringe benefits, or employer-paid group life insurance.
Because the local base is narrower, Box 18 is often lower than Box 16. Your state might tax the value of employer-paid group life insurance above a certain threshold; your city may ignore it entirely. The gap reflects each jurisdiction’s separate judgment about which forms of compensation belong in the tax base.
Living in One Place and Working in Another
When you live in one jurisdiction and work in another, geography adds a layer. Many neighboring states and localities maintain reciprocity agreements, arrangements where only one of them taxes your wages so you are not taxed twice on the same paycheck. Under a typical reciprocity agreement, your employer withholds tax only for your home state, and the work state agrees not to tax you.
These arrangements affect what shows up in Boxes 16 and 18. Your state may require all of your annual earnings in Box 16 because you are a resident. Your local work jurisdiction, on the other hand, may only report wages you earned while physically present within its borders. If you moved mid-year, you can end up with two entries in Box 18, one for each locality, and neither will match your state wages.
Some local ordinances limit their tax reach even further, to work performed strictly within city limits. Days you spent traveling for work or at a satellite office in another municipality may not count toward your local taxable wages, pulling Box 18 further away from Box 16.
Remote Work and Where Wages Are Sourced
Remote work has made the gap between state and local wages both more common and harder to predict. The general rule for local income tax is that wages are sourced to the place where you physically perform the work. Work from a home office, and your wages would normally be sourced to the city or county where your home sits.
A handful of states apply what is known as the “convenience of the employer” test. Under that approach, if you work remotely for your own convenience rather than because your employer requires it, your wages are sourced to the state, and sometimes the locality, where your employer’s office is located. A remote worker in one state can end up with wages reported, and tax withheld, for a completely different state or city.
The practical effect: Box 16 might reflect your employer’s state, Box 18 might reflect your home city, and the two figures may have very little in common. If you work remotely across state or local lines, check whether any jurisdiction involved uses a convenience rule, since it shapes how your income appears on the W-2 and whether you need to file in more than one place.
Local Caps and Flat-Rate Taxes
Not every local tax is a straight percentage of everything you earn. Some localities impose flat-rate taxes or cap the amount of income subject to local tax. A local services tax may apply only to the first slice of your earnings in that jurisdiction, with total annual liability capped at a fixed dollar amount no matter how much you make. Once you cross the threshold, Box 18 stops growing while Box 16 keeps climbing with every paycheck.
Other localities charge a flat occupational tax that does not scale with income at all. In those cases, Box 18 may show a modest figure or even zero, while Box 19 shows the flat local tax withheld. State wages almost never have a cap, so Box 16 continues to reflect your full annual pay. The combination of a capped local base and an uncapped state base is one of the most visually striking reasons the two boxes look so different.
When the Difference Points to an Actual Error
A gap between Box 16 and Box 18 is expected, but not every discrepancy is correct. If your local wages are higher than your gross pay, a locality you never worked in appears on the form, or the numbers do not line up with your pay stubs, treat it as a possible error.
- Compare Box 16 and Box 18 to the year-to-date state and local taxable wage totals on your final pay stub. If those match your W-2, the form is likely accurate even though the two boxes differ from each other.
- Ask your employer or payroll department to review the calculations. If they find a mistake, they can issue a corrected Form W-2c to you and the Social Security Administration.4Internal Revenue Service. About Form W-2 C, Corrected Wage and Tax Statements
- If your employer does not fix the error by the end of February, you can call the IRS at 800-829-1040 or visit a Taxpayer Assistance Center. The IRS will send your employer a letter requesting a corrected W-2 within ten days.5Internal Revenue Service. W-2 – Additional, Incorrect, Lost, Non-Receipt, Omitted
- If you still have not received a corrected W-2 by filing time, you can use Form 4852 as a substitute and estimate your wages and withholding from your year-to-date pay stub.6Internal Revenue Service. About Form 4852, Substitute for Form W-2, Wage and Tax Statement
Filing with wrong wage figures can lead to underpayment of state or local tax, which brings penalties and interest. The IRS imposes a 20-percent accuracy-related penalty on any underpayment attributable to negligence, and interest accrues on unpaid balances until you settle them.7Internal Revenue Service. Accuracy-Related Penalty State and local taxing authorities apply their own penalties on top of that, so catching a real error early is worth the phone call.