Do Employers Have to Withhold Local Income Taxes?

Pin It

Employers are responsible for local income tax withholding. This means that they must take out a percentage of an employee’s wages on every paycheck to cover the local income tax. They must report any withholding done on the tax return filed every year. Employees may receive a portion of their taxes back at the end of the year. Whether you are an employer or an employee, you need to understand where this money goes and the consequences of not withholding those taxes.

What is the Local Income Tax?

The local income tax is the tax used by the local government to pay for improvements and other needs. Some of the money that you pay to the local government every year may go towards improving the road conditions in your city, paying the salaries of government workers and bringing in new programs and equipment for both workers and citizens. You can check with your city and/or county to see how much you should pay or withhold every year.

Should Employers Withhold Taxes?

Employers generally need to withhold local income tax, but this only applies to those living in a city or community with a local tax code. You can check the tax forms available for your city and with the city itself to determine if you should pay a local income tax and if your employer should withhold that tax from your checks. Not all cities have a local income tax. Even if your city does not have income tax, it may require that you pay money to help fund and operate your local school district. The amount taken out of your check depends on the size, location and other factors relating to your local schools.

Exceptions to the Rule

The exception to local income tax withholding applies to contract employees. A contract employee is a type of freelancer who does not receive a guaranteed paycheck from an employer. Instead of getting a check every week or two, you might receive one large check at the end of the month that shows the amount you made. Employers are not responsible for withholding income tax on contract employees. You will need to use the 1099 forms that employers gave you when filing your taxes at the end of the year. Even though the individual or company did not withhold any taxes, you’re still responsible for filing and paying the taxes that you owe.

When Your Employer Does Not Withhold

The Internal Revenue Service frowns heavily on employers who do not properly withhold taxes on employee paychecks. According to the IRS, this is a form of tax evasion that carries steep penalties and possible consequences. It can lead to large fines and even jail time for employers and companies. If you are a full-time or part-time employee who receives paychecks but does not have any income tax withheld, you can contact the IRS and file a report. The IRS will investigate your claims and possibly bring charges against the company based on the results of that investigation.

Local income taxes go towards supporting the community at large and keeping your city running. While the IRS requires that employers withhold taxes when paying employees, not all cities require that employers use local income tax withholding because not all cities have a local income tax.

You might also like: What is a Day in the Life of a Human Resources Manager Like?

Pin It