Ohio, Pennsylvania Present Local Tax Compliance Challenges

Ohio has hundreds and Pennsylvania has thousands of municipalities and other local income tax districts that challenge employers’ compliance abilities, a payroll professional said June 21.

Pennsylvania has municipal and school district income taxes, local services taxes, and payroll preparation taxes, according to Bruce Phipps, CPP, a senior principal product manager at Oracle. Payroll preparation taxes are not withheld from employees, but the other types of taxes are, Phipps said.

Additionally, Philadelphia’s wage tax falls outside the legislation establishing other local taxes, the Local Tax Enabling Act and an act known as Act 32 that significantly simplified the local tax system in 2011, Phipps said. Under Act 32, local tax forms are largely standardized but still have some differences, Phipps said. He spoke at PayrollOrg’s 2023 Virtual Congress.

Philadelphia’s wage tax must be withheld from all residents, regardless of where they work and even if the employer does not have a location in Philadelphia, and from nonresidents working in the city, Phipps said. The tax does not have to be withheld when nonresidents work remotely from outside the city, he said.

Phipps used Pittsburgh and Scranton as examples of other cities governed by the standard local tax legislation. Both have city taxes that are imposed on residents regardless of where they work, school district taxes only imposed on residents, and local services taxes. Pittsburgh has an additional payroll expense tax, he said.

Local services taxes are flat dollar amounts per year collected where an employee works and only collected once per pay period, Phipps said. Most taxes range from $5 to $52 annually, but three cities have higher maximum amounts: $104 for Aliquippa and $156 for Harrisburg and Scranton, he said. Only taxes of up to $10 annually can be withheld in a lump sum, and all others must be prorated across each pay period of the year, he said.

Johnstown formerly had a $156 maximum but reverted to $52 effective April 29, Phipps said.

Pennsylvania employees must fill out a residency certificate provided by the state upon hiring and for any changes in address, Phipps said. “You really need to know where your employees live, you need to know where they’re working,” he said.

The certificate is used to determine the six-digit political subdivision code (PSD), which represents the local tax district, school district, and municipality for any address in the state, Phipps said. He said only the first two PSD digits, which represent the local tax districts that generally overlap with counties, must be reported on Form W-2, but some employers choose to include all six in Box 14.

Ohio Municipal, School District Taxes

More than 500 municipalities in Ohio have income taxes that they or a collection agency administer, Phipps said. Tax rates can range from 0.3% to 3% and are required to be flat, but any rate of more than 1% must be approved by voters at elections, he said.

Tax is withheld at the full rate if an employee only works in one location and must be prorated if an employee works in multiple locations, Phipps said. Employees may also accrue a secondary tax liability at their place of residence, but state law only requires tax to be withheld at the work location so employers may do courtesy withholding of the residence’s tax if it has a higher rate, he said.

Additionally, nonresidents can work in a municipality for up to 20 days in a year without being subject to its tax, which does not apply to professional entertainers or athletes and their promoters, Phipps said. If an employee exceeds 20 days in a municipality in a year, tax must be withheld for all days worked there, he said.

Ohio’s reciprocity agreements do not cover municipal taxes, which must still be withheld from employees otherwise benefiting from the agreements, Phipps said.

Ohio school districts also levy income taxes, which can only be assessed for five years at a time before they must be renewed at elections and are administered by the state, Phipps said.

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