Everything You Never Wanted to Know About Local Taxes

Fourteen US states collect local income tax, including Alabama, California, Colorado, Delaware, Indiana, Iowa, Kentucky, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia. For two of these states (Colorado and West Virginia), residents don't need to file a local income tax return because they don't collect their taxes based on a percentage of income.

So that leaves us with twelve states that necessitate a local income tax return. Which is fine. It's not our favorite thing to do, but it sure beats entering an endless list of crypto transactions.

Tree City Tax Service is based in Kent, Ohio, so we'll use our state as an example. Local taxes are flat rate taxes, as opposed to progressive taxes where the rates change as your income increases. Ohio's municipal tax rates range from 2% to 2.75%.

So we're not dealing with a huge tax burden, but it's still a shock to get a bill in April because your withholding wasn't properly collecting local tax.

Ohio has different municipal tax agencies like the Regional Income Tax Authority (RITA) and Central Collection Agency (CCA), while some municipalities collect their own tax and others don't collect at all (usually townships). Depending on where you live and work, your municipalities could be either taxing or non-taxing.

Typically, your employer withholds taxes for the municipality where the workplace is physically located. If the company is located in a non-taxing municipality, they don't withhold any local tax unless you specifically ask them to.

Depending on the local tax law, your resident city may offer a tax credit to residents who pay income tax in their workplace municipality. Basically, this credit says "You paid tax where you work, so we'll call it even."

For example: Susie works in Kent, a RITA municipality with a 2.25% tax rate. She lives in Akron, which also has a 2.25% tax rate. When Susie files her local taxes as a resident of Akron, she receives a credit for the taxes paid in Kent to bring her Akron taxes owed to zero.

However, if the rates don't match up exactly, you'll still owe the difference.

For example: Susie works in Canton, which has a 2% tax rate, and lives in Akron, which has a 2.25% tax rate. After accounting for the 2% she paid to Canton on her local taxes, she still owes Akron the remaining 0.25%.

If this is the case, Susie can request that her employer take an additional 0.25% in withholding for Akron so there are no surprises at tax time.

Moving during the year can affect the tax rates you owe. On your local tax return, you'll need to calculate how much of your income was made when you lived in City A vs. City B.

For example: Susie works in Kent (2.25%) and lived in Akron for 3.5 months of the year before moving to Youngstown (2.75%). Her credit from paying Kent taxes will cover the time she lived in Akron, but will owe an additional 0.5% on the portion of her wages she made while living in Youngstown.

If you work in multiple cities, each employer withholds their municipality's tax rate. Please raise a glass for Susie as we put her through another struggle.

For example: Susie works in Kent (2.25%) and lives in Akron (2.25%). She gets a second job working from home part time. The remote job doesn't withhold anything from Susie's paychecks because they are headquartered in a non-taxing state and Susie didn't know to set up withholding. On Susie's Akron return, she will get a credit for her wages made in Kent, but she must also pay Akron's tax rate on her remote wages, because that's where she is doing the work.

This isn't even getting into freelance or contract work reported on a 1099-NEC, which might include work in different cities or states. If you work in multiple locations, please keep accurate records of the income you made in each location, as well as your expenses as a contractor.

We hear you, Susie.

Most people can handle a straightforward local tax return with proper withholding. But once you move, pick up a second job, or any other combination of scenarios that complicate your taxes, it gets frustrating fast.

This is where we come in! We'll make sure your local taxes are calculated properly for each municipality, and we can also advise on withholding to help you work out the details with your employer.

Schedule a free tax consultation today, or email info@treecitytax.com and we'll get back to you within a week.