Governments rely on tax revenue to operate, so it stands to reason that federal, state, city and county authorities all want their share. While you’re paying your federal income taxes, you likely also pay a state income tax, as long as you live in one of the many states that have one. When you pay a tax on top of the base tax you pay the state, though, it’s known as a “piggyback tax.”
TL;DR (Too Long; Didn't Read)
A piggyback tax is an extra tax that local authorities tack on to an individual’s regular taxes.
What Is a Piggyback Tax?
A piggyback tax is a tax that is added to an existing tax. If you pay a state income tax and your city adds on an additional amount, for instance, that extra tax would be called a piggyback tax. A piggyback tax takes other taxes that residents pay into consideration, which is different from a state income tax that takes a percentage of your income with no concern whatsoever for what you paid the IRS.
Piggyback taxes can get a jurisdiction in trouble, if not applied correctly. In 2015, a county in Maryland was forced to pay back $10 to $15 million in taxes it had collected from taxpayers. Instead of piggybacking, the county was ruled to have been double dipping, charging residents twice on income they made. Instead, the county was supposed to credit residents for money they had made in other states before charging a piggyback tax. The case went all the way to the Supreme Court and the decision to require the county to pay the taxes back was upheld.
What Does Piggyback Mean?
To fully understand how piggyback taxes work, it can help to know what the word itself means. You may think of “piggyback” as a ride your parents gave you when you were a kid, but it also means to add something new to something else that was already effective. So, in the case of taxes, it would refer to joining a smaller tax to an existing, or base, tax.
Of course, in order to charge this tax, jurisdictions need to work together. States generally charge a base tax with the recognition that cities within the state can add their own amounts to that. Whether this is charged at the city or county level depends on how authorities in each of the areas structure everything. Even once everything’s in place, though, there have been instances where politicians and their constituents protest the tax structure and ask for changes to be made.
Piggyback Sales Tax
Perhaps the best example of piggyback tax is the sales tax structure set up in many states. Customarily this is charged as a base statewide sales tax rate, with local jurisdictions allowed to add on additional tax on each sale. Missouri has a 4.225 percent state sales tax, with local taxes ranging from 0 percent to 5.875 percent. In some areas of the state, consumers pay total sales tax as high as 10.1 percent.
States can also have a mandatory local rate on top of the base rate. This is how California’s sales tax structure is set up, with a base statewide rate of 6 percent plus a mandatory additional 1.25 percent added in every local jurisdiction. On top of this, cities can add their own sales tax onto the 7.25 percent minimum, with amounts going as high as 10.25 percent in some areas of the state.
Piggyback Income Tax
While all but seven U.S. states have state income tax, only a handful of states allow local jurisdictions to piggyback an income tax on top of that. Ohio is one of those states and as a result, it is considered to have an extremely high income tax rate. Ohio’s state income tax is based on nine separate brackets, the highest of which is 4.997 percent. On top of that, local areas charge between 0 to 3 percent. For instance, employees in Cleveland and Columbus pay 2.5 percent on top of their state income tax.
As high as Ohio’s income tax rates are, they come in second behind Maryland, which has the highest local income taxes in the nation. On a state level, residents pay between 2 percent and 5.75 percent, depending on their income levels. On top of that is the local income tax, which varies between 1.75 percent and 3.2 percent depending on the county where you live. For a high-income resident living in a top-tier county like Howard County or Prince George’s County, that could mean an annual tax bill of 8.95 percent in addition to federal income taxes.
School District Income Tax
In some areas, voters have chosen to allow local school districts to collect income tax on local residents. This is seen in 190 school districts in the state of Ohio and is based on a resident’s earned income, so income from pensions or Social Security benefits won’t apply. For those who live in the school district only part of the year, taxes will be based on the income they earned while living in the district.
In Pennsylvania, school districts collect tax on certain types of unearned income. These include dividends, royalties, short-term rental income, lottery winnings and some types of interest. All of this income needs to be reported on a form provided by the state revenue department and a return must be filed by April 15 of each tax year.
Hotel and Tourism Taxes
A great example of a piggyback is the tourism tax charged in some areas of the country. In Nashville, a city that welcomed 14.5 million visitors in 2017, an extra tax in touristy areas of the state can help pay for local expenses. Tennessee has no state income tax but compensates by having a higher than average base sales tax at 7 percent. The tourism tax Nashville charges to help pay for local services is seen in the form of hotel occupancy privilege taxes, at a rate of $2.50 per room and per night in Nashville, plus other taxes as approved by the city.
Not to be outdone, Las Vegas, also known as Sin City, has its own tourist tax. Like Tennessee, Nevada has no state income tax, so the base sales tax is higher. The sales tax in Las Vegas is 8.1 percent, but you’ll pay 12 percent tax at hotel rooms on the strip and 13 percent downtown. You’ll also find taxes tacked on to those show tickets you buy.
You’ll also pay extra in some areas of the country if you want to enjoy local attractions. Connecticut charges an admissions and dues tax on places that offer amusement, entertainment or recreation. This means a 6 percent additional tax on any movie ticket with a cost of more than $5. But for entertainment venues and festival hosts, the tax jumps to 10 percent. There is also a 10 percent tax on any dues collected for most social, athletic or sporting club organizations.
Chicago took “amusement” a step farther in 2018, expanding its amusement tax to include streaming services like Netflix. Called a “cloud tax,” the change means that local residents now pay a 9 percent tax to enjoy the latest season of Stranger Things. This is in addition to the city’s existing 5 percent tax on any live cultural performance in a for-profit venue that has a capacity greater than 750 seats.
Filing Piggyback Taxes
For businesses, all of this is complicated, since it means they must keep up with every possible tax being imposed on employees. Just as federal taxes are withheld, employers need to submit withholdings for an employee’s state, local and school tax as outlined by the revenue department overseeing collections. Businesses also must remit all of the taxes they’ve withheld either monthly or quarterly, as required by local authorities.
Taxpayers need only worry about paying taxes at the time they’re due. Generally, any local taxes will be filed when you file your state income tax, but the way this is done can vary from one state to the next, so it’s important to check for details. Just as you get a Form W-2 for the federal taxes your employer withheld all year, you’ll also get one detailing the local taxes that were taken out.
Credit for Taxes Paid
When asking, “What does piggyback mean,” it can help to differentiate between piggyback taxes and duplicate taxes. Tax collection agencies take measures to make sure the other taxes residents pay are taken into account. This is known as giving credit for taxes paid and is usually found on the tax form submitted to each of the jurisdictions you live in. For state tax purposes, you’ll file in every state in which you lived during the course of the year, noting the amount you paid to the other states as a credit.
If this sounds like it can be complicated, there’s a form designed to help. Most states provide an apportionment schedule, which helps you determine how much to pay based on the amount of time you lived in that area. Your taxes due rely on the area where your residence was located while you were working, not on the area where your business was.
Corporate Income Taxes
Individuals aren’t the only ones paying income taxes. Corporations pay corporate income tax, which was reduced to 21 percent under the Tax Cuts and Jobs Act. However, piggyback taxes can push the level of taxes paid much higher, which explains why the national average is 25.7 percent. Only six U.S. states don’t levy a corporate income tax, with businesses in those states able to enjoy paying only the 21 percent federal rate.
One of the states where corporations pay the highest income tax is Iowa, which has a corporate state income tax rate of 12 percent. This is added to the 21 percent base rate makes for a fairly hefty tax bill each year. But the TCJA brings good news to corporations in every state, since before its passage the federal corporate tax rate was a whopping 35 percent, putting the U.S. ahead of the global average.
Small Business Income Tax
Large corporations aren’t the only ones paying a tax on the income they bring in. Businesses have multiple options to choose from when setting up, including operating as a sole proprietorship, a partnership or a limited liability company. Sole proprietors run their business income through their personal income taxes. This is paid in the form of a self-employment tax, with taxes paid on all profits from the business.
For businesses that choose to identify as a partnership, earnings are reported to the IRS each year and split between the partners. Those partners file the information on their personal income taxes each year and pay taxes through there. If a business registers as a limited liability company, tax treatment depends on the number of members. Solo LLCs are registered as sole proprietorships, while LLCs with two or more members are classified as partnerships, with all members reporting their share of income through their own tax returns.
- Capital Gazette: Anne Arundel to repay $10-$15 million in double taxes
- Cambridge Dictionary: piggyback
- Avalara: What is California's sales tax rate?
- Bankrate: Is a state with no income tax better or worse?
- Symmetry Software: The Breakdown of Local and State Ohio Taxes
- Maryland Taxes: Tax Information for Individual Income Tax
- Ohio Department of Taxation: School District Income Tax
- SCHOOL INCOME TAX REGULATIONS
- Nashville Business Journal: Here's how many tourists came to Nashville last year, setting a new record
- Avalara: What is Tennessee's sales tax?
- Nashville.gov: Hotel Occupancy Privilege Tax
- Frommer's: Fast Facts About Las Vegas
- Connecticut's Admissions and Dues Taxes
- Forbes: Chicago's 'Cloud Tax' On Streaming Services Like Netflix Survives Legal Challenge
- Chicago Tribune: Metro wins and 'Hamilton' loses in mayor's proposed amusement tax
- Tax Foundation: The United States’ Corporate Income Tax Rate is Now More in Line with Those Levied by Other Major Nations
- NOLO: How Sole Proprietors Are Taxed
- IRS: Partnerships