Pennsylvania Employers: Prepare Now for Changes to Local Earned Income Tax (EIT) Collection

Dateline: November 2011

Reforms to Pennsylvania's local Earned Income Tax (EIT) collection system affect Pennsylvania employers and may bring some additional revenue to local school districts and municipalities. Consolidation of the EIT means employers will no longer have to remit taxes to multiple tax collectors. The tax currently being collected by each municipality's chosen tax collector is being centralized on a countywide basis, effectively shrinking the number of tax collectors statewide from 560 to no more than 69. However, the related administrative changes place additional responsibility on employers that can be costly and burdensome without proper planning. Employers should take action now to prepare for the change and avoid penalties.

Act 32, signed into law in 2008 with an effective date of January 1, 2012, streamlines tax collection by using standardized forms and definitions and consolidating EIT tax collectors. Other details of Act 32 include anticipated uniform withholding, remittance, and distribution processes. In addition, the rules for determining the correct tax rate to withhold have changed. Currently, tax is withheld based on the nonresident tax rate for the location in which the employee works. Under the new law, the employer must withhold tax at the greater of the employee's resident tax rate (the tax rate in effect where the employee lives) or the employer's nonresident tax rate (the tax rate in effect where the employee works). The determination of the correct tax rate to be withheld must be determined for each employee individually.

To prepare, Pennsylvania employers should do the following:

Identify the tax collection district (TCD) and the appointed tax officer where the business is located. Bucks County employers will now remit tax to Keystone Collections Group while Montgomery County employers will use Berkheimer.
Have every employee complete a certificate of residency form to identify the correct municipality and political subdivision where each employee resides. This form should be completed for all current employees. In the future, new forms should be obtained for new hires and whenever an employee moves.
For each employee, determine (1) the nonresident EIT rate for the business location and (2) the employee's resident EIT rate.
For each employee, identify the higher of the two EIT rates above, and withhold the higher rate.
Single-location businesses must file quarterly a detail of all employees, including their exact home address, their earnings, and the EIT withheld for the quarter. The collected taxes must be remitted with their filing.
Businesses located in more than one TCD can elect combined filing with one TCD, but must file and remit electronically on a monthly basis.

Employers who willfully fail to collect or truthfully account for and remit earned income taxes, will be committing a misdemeanor. If convicted, they may be fined up to $25,000 and/or be subject to imprisonment for up to two years.

Business owners in Pennsylvania must work closely with their payroll and accounting professionals to comply with these new regulations. For more information on local tax collection, visit www.picpa.org/Act32 or http://www.newpa.com/node/6710.