Major Changes Coming to Pennsylvania Local Earned Income Tax Collection System

Pennsylvania Act 32 of 2008 (Act 32 or Local Tax Enabling Act; Pa. Stat. Ann. §6924.504 et seq.) creates a new local income earned income tax (EIT) collection system that will be fully operational on Jan. 1, 2012. The main objective of Act 32 is to reduce the complexity of the local EIT collection system. The Act will reduce the number of local EIT collectors (tax officers) from approximately 560 to 21, beginning in 2012. There will be 69 tax collection districts or TCDs. Businesses with multiple locations across the State will be permitted to remit to the county tax collection district where they are headquartered, rather than to tens or even hundreds of collectors around the State, as is the case under current law.

Under current law, employee withholding is computed based on the tax rate at the employer's work site. Under Act 32, employers will be required to withhold at the higher of the earned income tax rate where the employee resides, or the nonresident tax rate for the municipality in which the employee works. For example, if an individual resides in a municipality/school district that imposes a total resident EIT rate of 1.6%, and the individual works in a municipality that imposes a municipal nonresident rate of 1.3%, a total EIT of 1.6% would be withheld from the employee. Employers can find the resident and work location withholding rates on the official tax register on the Pennsylvania Department of Community and Economic Development (DCED) website.

Within 30 days following the end of each calendar quarter, an employer with only one work site in a tax collection district must file a quarterly return and pay the amount of income taxes deducted during the preceding calendar quarter to the tax collector for the place of employment. Multi-work-site employers may, within 30 days following the last day of each month, file the tax return information and pay the total amount of income taxes deducted from employees in all Pennsylvania work locations other than Philadelphia to the tax collector in either the TCD where the employer's payroll operations are located, or to the TCD as determined by the DCED. Employers using this consolidated filing option must provide at least one month's notice to the tax collector in each of its work locations before making consolidated returns and payments. If an employer's headquarters is located outside of Pennsylvania, it may file a consolidated return/payment with any tax collector where the employer has a work site, other than Philadelphia. The DCED, in conjunction with stakeholders and current tax professionals, has made available, and will be developing, uniform tax forms for use by employers, employees, and tax collection committees.

Employees are required to complete a “Residency Certification Form” which will be used to identify the political subdivision (PSD) where the employee lives and the PSD where the employee works. See http://www.newpa.com/get-local-gov-support/municipal-statistics for assistance in locating and identifying PSD codes.

Four Pennsylvania counties (Chester, Lancaster, Lebanon, and Wyoming) have already adopted the new EIT collection system, rather than wait until Jan. 1, 2012. Of the four, only Chester County is requiring employers to use the new system before 2012. Chester County will not assess any interest or penalties against employers who did not use the new system in the first two quarters of 2011.

FAQs. The DCED has posted frequently asked questions (FAQs) on the new rules on its website. Here are some of the highlights:

Question. Where do we register for local income tax withholdings?

DCED answer. As an employer, for earned income taxes, you register with the earned income tax officer of the municipality/school district where your Pennsylvania business site is located. For local services taxes, you register with the local services tax officer of the municipality/school district where your Pennsylvania business site is located.

Question. Are we required to withhold local income taxes from all of our employees?

DCED answer. All employers with work sites within the taxing jurisdiction are required by law to deduct the earned income and local services taxes from their employees at that site if the tax is listed in the Earned Income Tax Register or Local Services Tax Register of the Department of Community and Economic Development.

Question. Must we withhold from employees who reside in Pennsylvania but work at our facility in another state?

DCED answer. The Local Tax Enabling Act does not require you to withhold earned income taxes from an employee who resides in Pennsylvania working for you in your facility in another state. Some employers do withhold and remit earned income taxes as a benefit to their Pennsylvanian residents who work out of state. The Act does not require employers to withhold local services taxes from an employee since this is a tax levied at the actual work location.

Question. Who is a nonresident?

DCED answer. A nonresident is anyone who resides outside the taxing district.

Question. Are we required to remit local tax withholdings to each nonresident's taxing jurisdiction?

DCED answer. Responsibility for transmitting withheld taxes of nonresidents to the employees' place of residence rests with the tax officer, not with the employer.

Question. Must we also register and remit local tax withholdings to the school district?

DCED answer. The Act requires employers to register only with school districts that have a different collector than the municipality.

Question. Are there any exceptions for withholding local taxes for the municipality/school district?

DCED answer. Yes, Philadelphia and Pittsburgh have exceptions. Philadelphia falls under the Sterling Act (i.e., it's not covered under Act 32) and requires employers to withhold and remit earned income taxes for all their employees who reside in Philadelphia even if they are employed at a site outside of Philadelphia. The Pittsburgh City School District has a similar requirement.

Question. We have heard that Act 7 requires employers to deduct the tax weekly. Is this true?

DCED answer. If a municipality and school district's combined local services tax rate is more than $10, employers must withhold the tax based on their number of annual payroll periods and are prohibited from withholding the tax in a lump-sum payment. Therefore, if an employer pays its employees weekly, the tax must be withheld weekly.