Local payroll tax compliance—long considered one of payroll’s most challenging responsibilities—is becoming even more complex as hybrid work, employee mobility, and expanding municipal tax regimes place new demands on payroll teams.
That message took center stage during the Capital Summit session “Optimize Your Understanding of Local Payroll Taxes,” where Tim Wallen, CPP, Director of Business Services and Payroll Consultant at Fit Money CPA, and Kelly Westfall, CPP, Head of Payroll at GPD Group, walked attendees through the operational realities of local employer withholding across the country.
“Local payroll tax compliance has never been more complex,” Wallen said. “With hybrid workforces, employee relocations, and changing municipal tax rules, payroll teams are under pressure to get it right.”
Local Taxes: Small Jurisdictions, Big Consequences
Wallen opened by grounding the discussion in fundamentals, reminding attendees that local payroll taxes are imposed at the city, county, and school district levels, separate from state and federal income taxes. Employers—not employees—are responsible for correct withholding and remittance, and mistakes can trigger penalties, amended returns, and employee frustration.
“These are taxes imposed by cities, counties, and school districts,” Wallen said. “They’re withheld from employee wages, and the employer is responsible for correct withholding and remittance.”
Local income taxes first emerged during the Great Depression, Wallen noted, with Philadelphia’s 1939 tax serving as a model for other jurisdictions. Once federal withholding proved effective, local governments followed suit, making employers the primary collection point.
Today, local payroll taxes exist in 16 states, requiring employers to navigate thousands of jurisdictions—each with its own rates, rules, and filing requirements.
Pennsylvania: Precision Required
Pennsylvania drew particular attention as one of the most complex local tax states in the country. Employers must manage both local earned income tax (EIT) and local services tax (LST), using six‑digit political subdivision (PSD) codes tied to employee residence and work location.
Under Act 32, employers must withhold the higher of the resident or nonresident rate and remit tax to the employee’s work location collector.
“It is imperative that we have address accuracy,” Wallen said, emphasizing that Pennsylvania’s residency certificate must be updated for every permanent address change. “A common error is using a PO box. The form specifically requires a physical street address.”
Wallen highlighted Pennsylvania’s Municipal Statistics tool as a best‑practice resource, calling it indispensable for payroll professionals. “I truly have that saved as a favorite on my toolbar,” he said.
Ohio: Workplace Withholding and School District Complexity
Ohio presents a different challenge, with municipal taxes generally based on work location, not residence. Employers are legally required to withhold tax for the municipality where work is performed, while “courtesy withholding” for residence cities remains optional—and often problematic.
“I highly don’t recommend courtesy tax withholding,” Wallen said, citing administrative burden and reconciliation challenges.
Ohio adds another layer of complexity through school district income taxes, which are residence‑based and mandatory for employers to withhold when applicable—even if the employer has no presence in the district.
“Ohio employers have the responsibility to withhold school district income tax from the pay of employees who reside in a taxing school district,” Wallen said. “Failure to withhold will result in penalties and interest—not for the employee, but for the employer.”
Westfall emphasized the importance of accurate address data and regular verification using Ohio’s Finder tool, as well as annual review of rate changes published by the Ohio Department of Taxation.
Kentucky: Layered and Variable Taxes
Kentucky illustrated how local taxes can multiply quickly. Depending on location, employees may be subject to overlapping city, county, transportation, mental health, or senior services taxes, some of which phase out based on income or age.
“It’s not just based on gross wages,” Wallen said. “Now we’re having to track limits to know when the taxes need to stop.”
Westfall added that Kentucky lacks a centralized collection system like Ohio’s RITA, requiring employers to file separately with multiple jurisdictions. “It gets really complex and convoluted when you get into that,” she said.
Remote Work Raises the Stakes
Both speakers stressed that remote and mobile work arrangements amplify compliance risk across all local tax states. Employers must track where employees actually perform work, distinguish between temporary and permanent locations, and monitor address changes that can trigger new withholding obligations.
“Remote work really proliferated during COVID,” Wallen said. “All of a sudden we have folks moving everywhere and working everywhere.”
Local taxes, he added, generally do not follow reciprocity agreements, even when states do—making payroll tracking especially critical for cross‑border workers.
Best Practices: Data, Tools, and Partnerships
To manage growing complexity, the speakers urged payroll teams to focus on fundamentals: accurate employee data, proactive monitoring of local tax changes, and strong partnerships with payroll providers and tax vendors.
Westfall described requiring employees to verify their address annually during benefits enrollment and training managers to emphasize accurate time and location reporting.
“Send me smoke signals if you want,” Wallen joked, underscoring the importance of sharing tax change information quickly—even when jurisdictions fail to notify employers clearly.
Payroll Takeaway: Local Tax Compliance Essentials
- Local taxes are expanding. More jurisdictions are relying on local income taxes, especially as remote work grows.
- Employers bear the risk. Penalties and interest apply to employers, not employees, for incorrect withholding.
- Address accuracy is critical. Residence‑based and workplace‑based taxes depend on precise employee data.
- Use official tools. State‑provided lookup tools in Pennsylvania and Ohio reduce error risk.
- Automation helps—but oversight matters. Even with vendors, payroll teams must monitor local changes and communicate internally.
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