Pennsylvania municipalities impose a variety of taxes on employers and employees, including income and payroll taxes and local service taxes, a payroll director said May 16.
The state has about 3,000 municipalities and school districts assessing local income taxes, many more than any other state, said Bruce Phipps, CPP, regional payroll director for the American Academic Health System. The primary law governing Pennsylvania local income taxes is known as Act 32, which was signed into law in 2008 by then-Gov. Ed Rendell (D) and took effect in 2012, Phipps said.
The law simplified a fragmented and inefficient local income tax system that suffered from more than $250 million in uncollected taxes a year, Phipps said. The tax losses largely may be attributed to the tax-collection challenges that result when 85% of residents in an average municipality work in a different municipality, he said.
Under Act 32, tax is remitted to the tax collector for the municipality where the employee works and forwarded to other municipalities if necessary, Phipps said. The employer must withhold at the higher of either the residence tax rate or the workplace tax rate, he said.
Additionally, employers also must withhold municipal local service taxes, which are assessed as dollar amounts in a pay period, rather than as a percentage, Phipps said. The maximum tax for most local service taxes is $52 a year, except for the city of Aliquippa, where the maximum is $104 a year, and the cities of Harrisburg, Johnstown, and Scranton, where the maximum is $156 a year, he said.
Employees must pay the local services tax for only one jurisdiction, so employees who have multiple employers must determine which is the primary employer for the purposes of paying the tax, Phipps said.
For new employees, the employer should verify the employee’s tax jurisdiction and register with any new jurisdictions, if required, Phipps said. For employees who are transferring workplaces, the employer should verify that the employee’s tax jurisdiction is correct, he said.
The state agency that oversees local income taxes and local service taxes is the Department of Community and Economic Development, Phipps said. However, the department serves as a regulator, providing standardized forms and acting as a source for information, but it does not administer any taxes, he said. Real administrative responsibility lies with the tax collectors, which are private companies, Phipps said.
Pennsylvania cities that impose their own taxes include Philadelphia, Pittsburgh, and Scranton, Phipps said.
Philadelphia is the only Pennsylvania city to which the provisions of Act 32 do not apply because the city has a wage tax administered by the city finance department, Phipps said. City residents are subject to the wage tax regardless of where they work. Nonresidents are only subject for work performed in the city. Employers without a presence in Philadelphia still must withhold the wage tax for Philadelphia residents, he said. The current tax rate, which generally changes on July 1 each year, is 3.8809% for residents and 3.4567% for nonresidents, he said.
Pittsburgh has a 1% city income tax, which applies to city residents and nonresidents, and a 2% school district income tax that is only for residents, Phipps said. Income taxes are collected by the area’s tax collector, Jordan Tax Services, while other taxes, such as the local services tax and the city payroll tax, are collected by the city finance department, he said. The Pittsburgh payroll tax is assessed on employers as 0.55% of gross payroll for employers located in the city, he said.
Scranton has a 2.4% city income tax and a 1% school district income tax for city residents, and a 1% city income tax for nonresidents, as well as a local services tax, Phipps said.