The City of Philadelphia.

The City of Philadelphia collects the Philadelphia City Wage Tax (CWT) under the authority of the Sterling Act of 1939. And as of 1994 all Pennsylvania employers are required by law to withhold the CWT from the wages of all employees who either work or live in the City of Philadelphia. Residents of the City of Philadelphia who work outside of the City are not subject to the EIT in the municipality where they work, even if the employer has to withhold it for all other employees.

Residents of Philadelphia are taxed at a higher rate than non-residents, and the tax rates have been revised each year for the last several years, effective July 1. So employers must be able to change tax rates in the middle of the calendar year, and must be able to report earnings separately for each half of the year. However, this appears to be changing because the last rate change occurred effective January 1, 2006.

Since the collection of the CWT is not subject to either Act 511 or Act 166, the definition of compensation is different. In fact, all compensation that is defined as earned income under the Internal Revenue Code is included in the definition of earned income in Philadelphia. In addition, the City of Philadelphia does not recognize the exclusion for retirement plan reductions (such as 401(k) plans) or Section 125 cafeteria plan deductions.

The CWT is primarily collected at the source. Employers are required to withhold the tax and deposit it with the Philadelphia Department of Revenue. If an employer collects more than $350 a month in taxes, deposits must be made on a monthly basis. If the collected tax is less than $350, deposits can be made quarterly. Residents of Philadelphia do not have to file any tax returns with the City unless the individual works in another state that does not withhold the tax. Employers must file an annual reconciliation report with copies of the employees’ W-2s.

The City of Philadelphia does allow non-residents to allocate a portion of their income to non-City sources if they only work in the City part of the time. If a non-resident works outside of the City, then the income earned outside the City is not subject to the CWT. However, the rules are slightly different depending on whether or not the employer has a business location in the City or outside of the City.

If the employer operates its business outside of the City and it has workers who perform services in the City, only the income that is earned inside the City is subject to the CWT. If the employer operates its business inside the City and it has non-resident employees who perform services outside the City, the income earned outside the City may be deducted from the employee’s gross earnings in order to determine compensation subject to the CWT. But that means that any pay for vacation, holidays, sick, or personal leave must be allocated to the City of Philadelphia and is subject to the CWT.

For instance, suppose an employee lives in Upper Dublin Township, works for an employer located in Rockledge, and works in the City of Philadelphia two days a week. 40% of his earnings are subject to the CWT at the non-resident rate, and the employer must withhold the 1% Rockledge EIT from the other 60% of the employee’s earnings. When the employee files his annual Earned Income Tax return with Rockledge, he will be able to credit the taxes that have been withheld from his income.

Since the definition of income in Philadelphia is different from the definition under Act 511, the allocation of income may result in the total not equaling the employee’s total gross compensation. To clarify this example, let’s present it in the form of an exhibit:

The total gross earnings for the two tax jurisdictions is $1,490.38. You will note that the allocation has to be calculated after determining what the total earnings base is for each tax. For the EIT the Section 125 can be deducted from the employee’s wages and the GTL can be ignored, but for the CWT the Section 125 cannot be deducted and the GTL must be added.

Residents of New Jersey who work in the City of Philadelphia have a special situation. Because of the reciprocal agreement between Pennsylvania and New Jersey, residents of New Jersey can have the New Jersey Personal State Income Tax withheld from their paychecks rather than the Pennsylvania SIT. But New Jersey residents who work in Philadelphia may take a credit on their New Jersey annual tax return for taxes paid to the City of Philadelphia. As long as the CWT is more than the New Jersey tax-withholding amount, New Jersey residents may request that their employers in Philadelphia not withhold any New Jersey tax at all.

Of course, if a New Jersey resident works outside of the City of Philadelphia as well as inside, and a portion of his income is allocated to outside the City, then that portion is subject to New Jersey SIT withholding.

City of Philadelphia Department of Revenue
Taxpayer Service Unit
Municipal Services Building
1401 John F. Kennedy Boulevard
Philadelphia, PA 19105
215-686-6600
www.phila.gov/revenue/

Table of Contents | EIT Procedures

Payroll-Taxes.com is a free online resource featuring a compilation of research, collaboration and web tools for use by payroll professionals and more including information about earned income tax, articles, federal tax information and state tax information.