Addresses and Work Locations Are Key to Local Tax Compliance

Compliance in the three biggest local tax states — Kentucky, Ohio, and Pennsylvania — requires careful tracking of employee addresses, among other duties, two payroll professionals said March 16.

Municipalities in those states are heavily reliant on income taxes, which can account for up to 36% of municipalities’ revenue, said Kelly Westfall, CPP, head of payroll at GPD Group.

“Pennsylvania has more local taxing jurisdictions than any other state, and employers must understand both the local earned income tax and the local services tax,” Westfall said. Tax rates are based on political subdivision codes (PSDs) that uniquely identify each municipality, she said.

Pennsylvania’s Department of Community and Economic Development provides state resources related to local taxes. Those resources include the residency certification form each employee fills out when hired or when permanently changing their address, which also reports their PSD. Employees must enter a physical address on the form, but Westfall said entering a PO box is a common error. Additionally, the PSD code 880000 must be used for Pennsylvania nonresidents working in the state, she said. Westfall advised never guessing PSDs and always looking them up on the DCED’s website.

Other tools that the DCED provides include one in which entering the employee’s and employer’s addresses lists what taxes the employee is subject to, what taxes to withhold, and which tax collector to report to, Westfall said. The employer must withhold the higher of the resident taxes for an employee’s residence or the nonresident rate for their workplace and report to the tax collector for the workplace’s location, she said. The entire state except for Philadelphia is part of the system of tax collection districts, while Philadelphia administers its own wage tax.

Besides earned income taxes, employers must also withhold local services taxes, often known as a "$1 a week tax” because of its maximum of $52 per year, although some municipalities have higher maximums, Westfall said.

Kentucky

In Kentucky, 87 of 120 counties have an occupational license tax as of 2026, but municipalities can also establish taxes, so there may be more than one local tax in effect in an area, said Tim Wallen, CPP, director of business services at Fit Money CPA and a payroll consultant for the Kentucky government. Occupational taxes are based on where work is performed, but may also have variations such as resident rates, exemptions, or no requirement to withhold above the Social Security wage base, he said.

Wallen recommended tracking employees’ daily work locations, residence changes, and where city and county taxes overlap. “We need to know where our employees are working every single day,” Wallen said, using an example of Kentucky government inspectors who travel around the state and must track their time according to which municipalities they work in.

Westfall and Wallen spoke at PayrollOrg’s Capital Summit in Arlington, Virginia.

One of the complicating factors of Kentucky local taxes is that each municipality collects their own taxes, or occasionally also collects some others in their area, Wallen said, adding that the state is “just the Wild, Wild West” for local taxes. Legislation introduced in 2025 to centralize local tax collection under the state treasurer’s office did not progress, he said.

Ohio

In Ohio, municipal taxes apply to both residents and nonresidents, but the employer must generally withhold tax for the workplace, while most municipalities offer credits for residents paying tax somewhere else, Westfall said.

Registering for Ohio taxes is based on the employer’s physical address, unless the employer is registering for an employee working from home, in which case the employee’s address would be used, Westfall said. In that case, the employee’s home should be marked as a workplace, not a residence, she said.

The next step is to determine which local tax administrator to register with, Westfall said. The largest administrator is the Regional Income Tax Agency, but Cleveland’s Central Collection Agency also collects for some municipalities and individual municipalities may collect themselves, she said.

In particular, “RITA of 2018 is different than RITA of 2026,” Westfall said, noting that it has more resources to help with local tax compliance than it did in the past.

Ohio school districts can impose income taxes that are based on an employee’s residence, so again employers must ensure employees’ addresses are accurate, Westfall said. Employees report their school district and its four-digit state number on the state withholding certificate, Form IT 4, Employee’s Withholding Exemption Certificate, she said.

Among the compliance challenges common to all three states are remote and hybrid work, including that reciprocity agreements do not apply to local taxes, Wallen said. For example, an Ohio employee working in Pennsylvania would still owe their school district tax if they had one, he said. Municipalities may require reporting payments to independent contractors as well, he said.

Besides tracking employees’ addresses and work locations, Wallen recommended training employees and managers on the importance of accurate time reporting to help with local tax compliance. “They’re on the front line of all this tracking we need to do,” Wallen said.