Local income taxes are a separate layer of tax that some cities, counties, school districts, and other sub-state jurisdictions charge on top of your federal and state income taxes. They exist in roughly 15 states, most rates fall between 0.5% and 2.5% of earned income, and if you live or work in a jurisdiction that levies one, you owe it whether or not your state return picks it up. Your employer may already be withholding it from your paycheck.
Which States Have Them
Local income taxes are concentrated in the Midwest and Mid-Atlantic. The states where they make up the largest share of local revenue are Maryland, Kentucky, Ohio, Pennsylvania, New York, and Indiana. Other states that authorize some form of local income tax include Alabama, Colorado, Delaware, Iowa, Michigan, Missouri, New Jersey, Oregon, and West Virginia.
How much of each state is covered varies a lot. In some, nearly every municipality and school district imposes one. In others, only a few large cities do. Two people living 20 miles apart can face very different obligations depending on which side of a boundary they fall on. If your state is not on the list above, you almost certainly do not owe a local income tax.
Who Owes: Residency vs. Work Location
Two things determine what you owe: where you live and where you work.
If your permanent home sits in a jurisdiction that levies a local income tax, you owe as a resident. Resident tax applies to all your earned income, including wages you earned commuting to a job somewhere else. Your home address is the basis for taxing your full earnings.
If you work in a taxing jurisdiction but live outside it, you owe as a non-resident, sometimes called a commuter tax. The work-location jurisdiction taxes the income you earned while physically present there. A suburbanite whose town has no local income tax but who drives into a city that does will still owe that city on the wages earned there.
When your home and your workplace both impose local income taxes, you can end up owing two separate bills on the same income. Credits and reciprocity, covered below, are how that gets resolved.
What Income Gets Taxed
Most local income taxes apply only to earned income: wages, salaries, tips, commissions, bonuses, and net self-employment profits. That is a narrower base than federal or most state income taxes.
Investment income like interest, dividends, and capital gains is generally exempt in jurisdictions that tax gross wages. The same typically goes for Social Security benefits, pension distributions, unemployment compensation, and retirement account withdrawals. Someone whose income in retirement comes from Social Security and a 401(k) may owe no local income tax at all, even in a jurisdiction that taxes workers.
The exceptions matter. Jurisdictions that start from federal adjusted gross income or state taxable income can capture some investment income, and a handful of localities tax interest and dividends specifically. Before assuming any income type is exempt, check your jurisdiction’s rules.
How the Tax Is Calculated
Local jurisdictions use different starting points, and the method affects how much you pay.
The most common approach, particularly in the Midwest and Mid-Atlantic, is a flat percentage applied to gross wages before any deductions. No adjustment for 401(k) contributions, health insurance premiums, or other pre-tax items. What your employer reports as gross pay is what gets taxed.
Self-employed individuals, sole proprietors, and businesses are usually taxed on net profits: gross receipts minus ordinary business expenses, with the local rate applied to the remainder.
A smaller number of jurisdictions use a modified taxable income figure, starting from federal adjusted gross income or state taxable income and making local adjustments. This approach captures a broader range of income than gross wages alone.
Most local income taxes are flat: the same percentage applies whether you earn $30,000 or $300,000. Rates in most places fall between 0.5% and 2.5%, though some larger cities push above 3%. The notable exception is New York City, which uses a progressive structure with brackets running from roughly 3.08% to 3.88%. Some jurisdictions also exempt the first several thousand dollars of income, which can zero out the tax for lower earners.
When You Owe Two Jurisdictions
If both your home and your work jurisdiction impose local income tax, two mechanisms keep you from paying twice on the same dollar.
Credits
The more common relief is a credit. You pay the local tax to your work jurisdiction first, then claim a credit for that payment against what your home jurisdiction charges. The credit is typically capped at the lesser of what you actually paid to the work city or what your home city’s rate would produce on the same income.
In practice: if the work city charges 2.0% and the home city charges 1.5%, you pay 2.0% to the work city, get a credit up to 1.5% at home, and owe nothing more. Your total burden ends up at the higher of the two rates, not their sum. Some jurisdictions handle this credit on the local return itself; others route it through the state income tax return.
Reciprocity Agreements
Some jurisdictions have reciprocity agreements. Under these, you only owe local tax to your home jurisdiction regardless of where you work within the agreement zone. Your employer withholds at the home rate, and the work jurisdiction doesn’t tax you. These agreements eliminate the need for credits and multiple filings, but they are far from universal.
Remote Work and the Convenience Rule
Remote work complicates the traditional rule that income is taxed where the work is physically performed. If you work from home three days a week and commute to an office in a different taxing jurisdiction two days a week, most jurisdictions allocate your income by the percentage of workdays spent physically inside their boundaries. Monday at home sources that day’s income to your home jurisdiction; Tuesday at the office sources it to the office’s jurisdiction. Simple in theory, but it demands careful record-keeping.
A small number of states apply what’s known as the convenience of the employer rule. Under this rule, if you are working remotely for your own convenience rather than because your employer requires it, your entire wages are taxed as if you were working at the employer’s office location. The burden is on the remote worker to show the arrangement was a business necessity, not a personal preference. Only about six states apply some version of this rule, but if your employer is based in one, you can owe local tax to a jurisdiction you rarely set foot in.
Filing and Withholding
W-2 employees usually have local income tax handled through payroll withholding. Your employer deducts the amount from each paycheck and remits it, using your home address and, where applicable, your work location to determine the right rate. The withholding appears on your pay stub and in Box 19 of your year-end W-2.
Self-employed workers and anyone with significant income that isn’t subject to withholding typically owe quarterly estimated payments, generally following the federal schedule of April 15, June 15, September 15, and January 15 of the following year.1Internal Revenue Service. Individuals 2 Falling behind can trigger underpayment penalties from the local collector.
Most local filing deadlines mirror the federal April 15 date.2Internal Revenue Service. When to File The local return is separate from your federal and state returns, with its own forms. A common stumble is assuming state filing covers the local tax automatically. In most cases it does not.
Moving Mid-Year
Move from one taxing jurisdiction to another during the year and you become a part-year resident of both. Each taxes only the income you earned while living there. Four months in one city and eight in another means you owe the first city’s tax on four months of wages and the second’s on eight.
You’ll typically file a part-year return for each, with dates of residency and income allocated to each period. Keep your move-in and move-out dates documented. If your old city keeps receiving withholding after you’ve moved, you’ll need to file for a refund there and update your withholding with your employer for the new address.
Penalties
Local tax authorities do enforce their filing and payment rules, and the penalties can be steeper than you’d expect. Late-filing penalties, late-payment penalties, and interest all apply, and unpaid balances often carry penalty rates in the 15% to 25% range plus interest. For calendar year 2026, some jurisdictions are charging interest at 9% per year on unpaid balances, accruing from the original due date rather than from when you notice.
The bigger risk is not knowing you owe. Move to a new city, start a side business, or begin commuting across a tax boundary, and no one is required to alert you that you now have a filing obligation. Local authorities do catch up eventually through employer withholding data and information sharing, but by then penalties and interest may have been running for years.
The Federal Deduction
Local income taxes are deductible on your federal return if you itemize, but they fall under the state and local tax (SALT) cap. For 2026, the SALT deduction is capped at $40,400 for most filers and $20,200 for married filing separately. That cap covers the combined total of state income taxes, local income taxes, and property taxes. If your state income tax and property taxes already push you near the ceiling, your local income tax may provide little additional federal benefit. If you take the standard deduction, it provides none.
A Different Thing: The Local Services Tax
Separate from percentage-based income taxes, some jurisdictions levy a small flat annual fee on anyone who works within their boundaries, commonly called a Local Services Tax or Occupational Privilege Tax. It is typically modest, often capped at $52 or less per year, and collected through small payroll deductions across pay periods. Low-income workers are frequently exempt. It is not the same as a local income tax and doesn’t scale with what you earn.
How to Find Your Local Rate
Start with your state’s department of revenue or community affairs website. Several states maintain lookup tools where you enter your home address and get back the applicable resident and non-resident rates. Your employer’s payroll department can confirm what they are withholding and at what rate. When in doubt, call your city or county tax office directly. Local rules are too varied for any single national database to capture perfectly, and a short phone call can prevent a year’s worth of underpayment penalties. Box 19 of your W-2 will also show local taxes withheld, which is a useful cross-check against what you expected.