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Doesn’t City Income Tax Use the Same Numbers as Federal Taxes?
The short answer is No. The numbers are different.
Federal and most State tax returns subtract for fringe benefits (e. g. 401K), adjustments (e. g. student loan interest) and/or a standard deduction before calculating total taxable income also known as Adjusted Gross Income or AGI.
However, Cities usually base their taxable income on the Box 5 of the W-2 (Medicare or Total Gross Taxable Wages). Usually, there is no deduction for fringe benefits (e. g. 401K or Health Insurance). Therefore, the City Taxable Income may be higher than the Federal or State Taxable Income.
City Taxable Income and Federal Taxable Income may also differ if: the employer location is INSIDE the city limits and employee lives OUTSIDE the city limits. If the employer certifies that wages were earned outside of the city limits, then these wages are non taxable city income. Employer certification is usually issued after the W-2 is issued and taxes are already withheld. Employee receives a city refunds for taxes withheld on these certified wages. Special return filing is required.
City Taxable Income and Federal Taxable Income may vary for self-employed taxpayers too. If the business and the business owner are both located OUTSIDE the city limits and the business only worked part time or just a few jobs INSIDE the city limits, then taxable business income (“Net Profit”) is prorated according to the income earned INSIDE the city limits (see city tax return instructions).
City Taxable Income rules are different. Carefully review City Tax Return instructions or contact your tax advisor to ensure the correct tax amounts are withheld or paid.