New Local Tax Laws Add to a Patchwork of Complications
Wednesday September 5th, 2018
In July 2018, New Jersey became the latest state to pass legislation allowing cities to impose payroll taxes on employers, joining 15 other states that allow local taxing.
The New Jersey bill allows municipalities with more than 200,000 residents to impose employer payroll taxes of up to 1 percent of total payroll to be paid to directly to the local school district.
Local payroll taxes generally are used for a variety of specific programs – unlike progressive income taxes, which flow directly into the city's general fund. Payroll taxes are usually set at a flat rate for all taxpayers and earmarked for specific programming, like New Jersey's recent law, which allows cities to collect payroll taxes specifically for schools.
However, a wide variety of local taxes on employee income are appearing in municipalities across the country, taking the form of a wide variety of wage taxes, income taxes, payroll taxes, local services taxes, and occupational privilege taxes.
In most cases, the employer withholds the tax. However, in some cities, such as San Francisco and Portland, Oregon, the tax is levied directly on employers. In some cases, a local tax is assessed as a percent of wages. In others, the additional local tax is calculated as a percentage of federal or state tax. In some cases, the local tax is a flat amount paid equally by all wage earners.
- Two West Virginia cities charge $2 or $3 weekly on every person who works in their cities.
- Appanoose County, the only Iowa county that has a local tax, charges 1 percent on all workers, with the funds earmarked for emergency services.
- In Yonkers, New York, workers pay 15 percent of their state tax to the local government.
Some local income taxes are permanent—often to fund operating budgets. Other local income taxes are temporary and fund a specific, short-term purpose, which complicates matters for payroll managers.
Local payroll taxes are paid by the employee, but are usually withheld and deposited by the employer. However, in some locations, the employer pays the tax. For example, Colorado's occupational privilege tax requires employers to pay a tax for each employee at the business.
If an employee works in a location that imposes a local income tax, employers must deduct that tax from their wages. The employer must:
- Register with the income tax office of the school district or location where the business is located.
- Calculate each employee's taxable wages during each payroll run,. Then, determine how much to withhold by using tax tables or multiplying by the local rate. Payroll software can be programmed to calculate the withholding.
- Remit the taxes. Local taxes are due quarterly, but due dates vary. The local taxing agency will have a schedule for depositing local taxes.
- Send Form W2s after the end of the year to every employee on the payroll for the past year, which will include the amount of local tax withheld.
As soon as this new rule hits Vertex, iSolved Tax will be able to handle management of it for employers in New Jersey and other states that allow local taxing.