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PA Local Earned Income Tax - Act 32: What Is It, When Is It Effective & Who Does It Affect?

Pennsylvania Act 32 will implement many new local earned income tax (EIT) collection changes starting January 1, 2012. The new law mandates EIT withholding even if the employer is located in a jurisdiction with no EIT.  More importantly, employers are required to withhold tax at the higher of either: 1) the nonresident tax rate that is imposed by the jurisdiction where the employer is located or 2) the resident EIT rate where the employee resides.  Since the EIT is a trust fund tax, you could be personally liable for under-withheld amounts. 

Pennsylvania Act 32 affects all PA employees and every PA employer with employees. It also affects self-employed individuals filing a PA earned income tax return with a local tax jurisdiction.

The History

Act 32 was enacted in 2008 with the objective of consolidating the collection of the local earned income tax (EIT) on a county-wide basis. PA (excluding Philadelphia) was streamlined from about 560 tax collectors into 69 Tax Collection Districts (TCD). Each TCD is controlled by a Tax Collection Committee (TCC). For years taxpayers and tax practitioners have been complaining about the inconsistency as to how the EIT was enforced by the tax collectors and local tax jurisdictions. Some collectors and tax jurisdictions made up their own rules and refused to follow case law. Some jurisdictions would not accept a generic EIT form or even a photocopy of their EIT return. The outcry of injustice became so loud that Act 32 was enacted to improve the collection process.

What you need to do before 2012: 

• Employers need to make sure they are registered with their county's designated tax collector.  We expect that most employers will be receiving a mailing from their tax collector regarding their registration. 
• Employees need to complete and sign a "Residency Certification" form which they then give to their employer.  This form identifies the tax jurisdictions where the employee lives and works. 
• Employers will then need to look up the employee's resident tax rate, compare it to the employer's jurisdiction nonresident tax rate and withhold at the higher of the two rates in 2012.

Get familiar with the new requirements and set up systems and procedures to capture the required information.  At Alpern Rosenthal, our business advisors are available to assist you if you have questions.

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