City or Local Tax Withholding 

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REFERENCE: 

• DoD Financial Management Regulation Volume 8, Chapter 4, dated July 2008

TERMS USED: 

• Civilian Payroll Office = DFAS (Indy)

• Employing Activity = DLA

• CSR = CoE

AS CITED:

040702. Voluntary Withholding of City or Local Tax:

A. Nonresident Employees. An employee who does not reside in the state in which the 

city or county (place of employment) is located is exempt from mandatory withholding; however, 

if there is an agreement between the city or county taxing authority and the Secretary of the 

Treasury, the civilian payroll office may withhold tax with the employee's consent. The 

employee must submit a withholding certificate.

B. Allotment for Voluntary Deduction. Employees have the option of making voluntary 

allotments for the payroll deduction of taxes of their city or county of residence if they are 

employed outside that location. The fact that taxes are withheld for the city or county of 

employment does not affect the employee's voluntary allotment. 

1. An employee may make a voluntary allotment for withholding even though the city or 

county does not have a withholding agreement.

2. The civilian payroll office shall set the allotment amount on the city or county 

withholding method or deduct a whole dollar amount set by the employee. The employee must 

submit a proper withholding certificate.

C. Accounting for Voluntary Withholding. The civilian payroll office shall account for 

voluntary tax deductions as prescribed for mandatory withholdings.

D. Amount of Withholding

1. The civilian payroll office shall withhold tax based on:

a. The proper city or county tax withholding rate set in the city or county 

instructions;

b. The prescribed percentage or formula method; or c. Computation of a set 

amount to be deducted from the employee's pay each pay period. 

2. The civilian payroll office shall deduct an amount, at a minimum, nearly equal to the 

tax required by the city or county. 

040703. Withholding Certificates:

A. Employees must submit withholding certificates; they must provide the CSR with 

all the information needed to properly deduct city or county income taxes. If an employee 

does not furnish a certificate, the civilian payroll office shall withhold tax at the highest level that 

applies to that employee's annual wages; however, the civilian payroll office shall not withhold 

any tax from wages of an out-of-state employee until they submit a form consenting to 

withholding.
City or Local Tax Withholding 

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B. Employing activities may use a withholding or exemption certificate furnished by a city or 

county if it contains all required information. If the form does not contain all needed information, 

employing activities may use FMS Form 7311 (Employee Withholding Certificate for Local 

Taxes).

C. The CSR may furnish copies of the employees' withholding forms to the city or county on 

request; however, only information properly releasable under the Privacy Act shall be released.

040704. Accounting for City and County Mandatory and Voluntary Withholdings:

A. The civilian payroll office shall record amounts withheld each pay period in the 

employee's pay records when a special payment occurs; otherwise, the system will 

automatically update an employee's record.

B. Deposits. The civilian payroll office shall make a one-line entry on the DD Form 592 as 

follows:

1. Enter "Withheld City (or County) Income Tax" below state or territorial tax and the total 

amount withheld each pay period.

2. Credit the withheld tax to deposit fund account--X6275 for city and county tax.

C. Correcting Errors. Civilian payroll offices shall apply the same instructions applicable to 

the withholding of state taxes. Refer to subparagraph 040601.A.11.c. of this volume for 

procedures.

D. Paying Out Withheld Taxes. Civilian payroll offices shall apply instructions for state tax.

E. Annual Form W-2 Reporting. Refer to Chapter 9, subparagraph 090207.C. of this 

volume, for reporting procedures.

040705. Recordkeeping:

A. Civilian payroll offices shall keep all records of city or county income tax deductions. 

Records should include the:

1. EIN assigned by the city or county;

2. Amounts and dates of all wages subject to city or county tax withholding;

3. Names, addresses, and SSN of employees;

4. Dates and amounts of city or county tax paid; and

5. Copies of all returns filed.

B. The employing activity shall file withholding authorization certificates for city tax 

deductions in a file for each employee until superseded or canceled.