Compiled by Robert W. Ditmer,
CPP
What Are the Employer's Obligations?
Only Pennsylvania employers are subject to the tax laws of Pennsylvania, so it is necessary to define what is meant by the term “Pennsylvania employer.” Any employer who conducts business in the Commonwealth of Pennsylvania and has employees performing services in the state is a Pennsylvania employer. The employee must have an established location for performing services, or a location at which the employee performs administrative duties, even if the location is the employee’s home.
So if an employer has employees working at a store, in an office, in a plant, or working as a telecommuter from the employee’s home in Pennsylvania, the employer is a Pennsylvania employer subject to Pennsylvania law. Court cases have established that even sports teams whose players compete at a location in Pennsylvania are Pennsylvania employers.
Act 511 requires that any PA employer with a business location in a jurisdiction that imposes the EIT must register with the local earned income tax officer or tax administrator. The employer must withhold the EIT from all employees if the tax is imposed on all non-residents. If the taxing jurisdiction is a school district, or if the municipal EIT is imposed only on residents, then the employer must withhold the EIT only from employees who live in the jurisdiction.
If the business is located where a municipality and school district overlap, the employer is still required to withhold the EIT at the full rate because the municipality is not required to share the tax collected with the school district on non-resident employees.
Pennsylvania employers should, therefore, keep the following in mind. Employers do not have to withhold the EIT for the jurisdiction where the employee lives! The only exception is if the employee lives and works in the same jurisdiction, which would be the case if the employee were a telecommuter or a traveling worker who maintains an office in his home as his primary place of business. Employers only have to withhold the tax if the business is located in a jurisdiction that imposes the tax.
In some jurisdictions that impose the tax only on residents, some employers have tried to do their employees a favor by withholding the tax based on where the employee lives and remitting it to the local tax collector. This is not a wise practice because in such cases the tax administrator will not forward the collected tax to the employee’s residence jurisdiction. The tax administrator in such jurisdictions is often a single person who collects the tax only from residents. These administrators are able to accept taxes that are forwarded to them by other tax administrators, but they do not have the resources to forward collected taxes to other administrators.
If an employer is obligated to collect the EIT, then the employer must determine in which municipality and school district each employee lives. This information, along with the employees’ names, social security numbers, earned income, and withheld tax, has to be reported quarterly to the local tax administrator. The earned income and tax withheld must also be reported on a Form W-2 to the employee at the end of the year. Employers may be required to file an annual reconciliation form with copies of Form W-2, but this is not required by all tax collectors. The employee must attach a copy of his Form W-2 to his annual EIT return if he is required to file one.
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