Local taxes are an even further extension of the federal income tax withholding, just on the local level. Businesses that operate in a particular state will generally be able to access information their particular locality through their state's revenue office. Taxes withheld on the local level will not usually require a separate form. Local government entities will generally require that you file a copy of the state form with their local offices. Employers will generally file W-2 information and the information return accompanying W-2's with the IRS, the applicable state agency, and then with each necessary local level.

Actual tax deposits are generally made on the state level, and each state revenue office will transmit local taxes to the proper tax office. There is no social security or Medicare tax withheld at this level and usually there are no unemployment taxes withheld at the local level. Businesses are liable for withholding and reporting of the wages earned by each employee, and the timely filing of such withholding and reporting just as at the federal and state level. Quite often, however, the local offices will require only an information return, as transmittal of actual tax withholding will come from the applicable state.

Local tax rates are even lower than those of the state level, and sometimes are referred to as a permit tax. Some cities charge a flat fee for employees to come into their city and work, especially if they reside outside the city limits or in another city altogether.

Small businesses can refer to their individual states' Department of Revenue, Department of Industrial Relations, Employment offices, or Small Business Administration for direction and assistance in complying with all state and local laws. Additional information may be obtained thru the IRS website at www.irs.gov . There are numerous publications that provide direction and instructions for small businesses such as IRS Publication 15, Circular E Employers Tax Guide, and links to individual state and local websites.