In 2008, the Pennsylvania Legislature enacted Act 32, which takes effect January 1, 2012. Act 32 streamlines countywide collection of local earned income taxes in Pennsylvania by establishing the responsibility of collection and remittance of these taxes upon the employer. The efficiencies of this act are expected to generate additional millions of dollars for local governments and school districts by replacing the hundreds of different tax collection agencies that existed previously with a much smaller number of agencies.
Under Act 32, all employers with any employees working in Pennsylvania are now required to withhold local earned income taxes for all employees if either the business or the employee’s residence is located in a jurisdiction that imposes a local earned income tax (effective January 1, 2012). Currently, there are hundreds of jurisdictions in Pennsylvania that impose a local earned income tax. For each employee, Act 32 states that employers must withhold at the higher of either the local tax rate of the employer’s location or the employee’s residence. Every Pennsylvania jurisdiction which imposes a local earned income tax has been assigned a unique political subdivision number (“PSD”), which identifies the jurisdiction, school district, and municipality. These PSD numbers identify where every local earned income tax dollar withheld belongs.
Employers who utilize a payroll service provider should discuss the Act 32 requirements with their payroll service provider to ensure that these taxes are properly collected and remitted by the payroll service. However, the employer will be responsible for obtaining a completed Residency Certification Form for every employee. This form will identify each employee’s resident taxing jurisdiction and will aid the employer and the payroll service provider, if applicable, in the collection of taxes at the proper rate for each employee. Employers should determine whether they are subject to Act 32 withholding requirements due to either their business location or the residence of any one of their employees. Once employers determine that they are subject to Act 32, they have 15 days to obtain Residency Certification Forms from their Pennsylvania employees and register with the appropriate tax collection district for earned income tax withholding. Thus, employers will generally need to complete this registration process no later than January 15, 2012.
The employer withholding requirements of Act 32 do not apply to businesses or employees located in the City of Philadelphia or employees who are Philadelphia residents and may be working in a locality that imposes an earned income tax. However, Philadelphia businesses with employees who reside in localities included in Act 32 will be required to file a report disclosing these employees and showing the home PSD of each. The work PSD will be listed as Philadelphia and no earned income taxes will be withheld. Businesses in a location subject to Act 32 would include any Philadelphia resident employees on their reports listing the home PSD of Philadelphia and no local tax withholding. Act 32 does not alter the Philadelphia wage withholding and remittance requirements that are currently in place.
Self employed individuals are not subject to the Act 32 requirements and should continue to remit their local earned income taxes through quarterly estimates as usual.
Employers who utilize outside payroll services should check with their account representatives to ensure that the payroll company will comply with the provisions of Act 32, but remember that the ultimate responsibility for compliance rests with the employer.
Should you have any questions on Pennsylvania Act 32, please contact Dan Effron or John Heilmann in our Pennsylvania office at 484-270-2500 or your local Marcum LLP SALT professional.