Local earned income tax for Pennsylvania employers: what to withhold and where it goes

Pennsylvania employers withhold more than federal and state income tax. Almost every paycheck also carries a local earned income tax, and many carry a local services tax. Both depend on where the employee lives and where they work, which is why local tax is one of the most common payroll mistakes we clean up for new clients.

The local earned income tax

Under Act 32, every Pennsylvania employer withholds local earned income tax (EIT) from employees who work here. The rule for how much is simple once you see it:

• Withhold the higher of two rates. Compare the employee's resident rate, where they live, with the nonresident rate where they work. Withhold whichever is greater.
• An example. If an employee's home municipality and school district levy a combined 0.5%, and the municipality where they work charges nonresidents 1.0%, you withhold 1.0%.
• Check rates twice a year. Rates can change on January 1 and July 1.

PSD codes and the residency form

• PSD codes. Every Pennsylvania municipality and school district combination has a six-digit political subdivision (PSD) code. Employers have to use these codes on local withholding reports, both for where the employee lives and for the worksite.
• Residency Certification Form. Every new employee completes this form at hire, giving their home address and PSD code. Keep it on file, since the tax officer can audit it, and have the employee complete a new one whenever they move.
• Look it up, do not guess. The Department of Community and Economic Development (DCED) has a free address search that returns the PSD code and EIT rates for any Pennsylvania address. Search for "DCED PSD codes and EIT rates."

Where the money goes and when

• Pay the worksite's collector. Withheld EIT goes to the tax officer for the tax collection district where the employee works, not where they live. That collector then distributes it to the employee's home municipality.
• Quarterly deadline. Withholding is due within 30 days after the end of each quarter, along with the employer's quarterly return.
• Annual reconciliation. Employers file an annual reconciliation (Form W-2R) by February 28 for the prior year.
• Several locations? An employer with worksites in more than one collection district can choose to file with the district where it is headquartered, but then has to file and pay electronically every month.

The tax collector differs from one collection district to the next, even within the same county. DCED publishes a list of local income tax collectors by district.

The local services tax

Many municipalities also levy a local services tax (LST) on people who work there.

• Up to $52 a year. It is withheld in equal amounts each pay period. On a weekly payroll, $52 works out to $1 per paycheck.
• Based on where the employee works. An employee with more than one job pays it to the municipality where they are principally employed.
• Low-income exemption. Where the tax is more than $10, employees who earn less than $12,000 a year from all sources in that municipality can file an exemption certificate. Exemption certificates expire each year.

Mistakes we see most

1. Using only the resident rate. If the worksite's nonresident rate is higher, withholding at the resident rate leaves the employee short.
2. Sending the tax to the wrong collector. It goes to the worksite's district, not the employee's home district.
3. Old addresses. An employee moves, nobody updates the residency form, and a year of tax goes to the wrong municipality.
4. Owners on S-Corporation payroll. Owner wages are subject to local EIT like any other employee's.
5. Skipping the W-2R. The February 28 reconciliation is easy to forget after the January W-2 rush.