What Are Local Payroll Taxes? City and County Withholding Explained

Key takeaways

• Local tax is separate from federal and state income tax.
• Residence and work location can produce different liabilities or rates.
• Remote and multi-location work can change sourcing, but the rules are jurisdiction-specific.
• Form W-2 boxes 18 through 20 usually report local wages, local income tax, and the locality name.

What counts as a local payroll tax?

Local deductions can include city wage taxes, municipal earned-income taxes, county income taxes, school-district income taxes, or occupational taxes. The name alone does not reveal who owes it. A jurisdiction may tax residents wherever they work, nonresidents who work inside its borders, or both under different rules. Another location may impose no employee wage tax at all.

Philadelphia provides a useful official example. Its Department of Revenue explains that the city taxes compensation of residents and certain nonresidents who work in Philadelphia. When an employer withholds the amount, it is called Wage Tax; when an employee must pay directly because withholding did not occur, the city calls it Earnings Tax. This is one local system, not a nationwide template.

Residence tax versus workplace tax

A resident-based tax follows the employee’s home jurisdiction. A workplace tax is sourced to the place services are performed. Some local systems combine those ideas, offer a credit, use reciprocity, or distinguish required remote work from work performed elsewhere for convenience. The applicable rule can depend on daily work location, the employer’s business presence, and local definitions.

New York City and Yonkers illustrate another arrangement: New York withholding forms account for New York State, City of New York, and City of Yonkers taxes, while nonresidence and allocation can require a separate certificate. An employee should not assume that every city tax works like New York or Philadelphia.

How local tax appears on a paycheck and W-2

A pay stub may abbreviate a locality or use labels such as city tax, local tax, municipal tax, or earned-income tax. On Form W-2, boxes 18, 19, and 20 report local wages, local income tax, and the locality name. One employee can receive multiple local entries if payroll tracked more than one jurisdiction.

Do not compare the local tax amount only with federal taxable wages. A locality may define taxable compensation differently. Pretax retirement contributions, benefits, bonuses, commissions, and stock compensation may not receive the same treatment everywhere.

How to check a questionable deduction

• Copy the exact pay-stub label and locality shown on the W-2.
• Confirm the residence and work location payroll used for that period.
• List any days worked in another city, county, or state.
• Open the official revenue department page for that locality and check employee withholding, nonresident, remote-work, credit, and refund guidance.
• Ask payroll for the taxable wage base and rate used. If necessary, ask the local agency whether a correction or refund process applies.

Moving or changing worksites should be reported promptly. A payroll correction does not automatically amend a tax return already filed, and a return correction does not automatically update future payroll.

Where this comes from

• IRS: Instructions for Forms W-2 and W-3 (opens in a new tab)
• IRS: State Government Websites (opens in a new tab)
• City of Philadelphia: Earnings Tax for Employees (opens in a new tab)
• City of Philadelphia: Who Pays Wage Tax and When (opens in a new tab)
• City of New York: Withholdings (opens in a new tab)