Pennsylvania Act 32 Information

If you are an employer located in Pennsylvania or have PA residents as employees, a significant change to the local tax laws called Act 32 will affect you starting in 2012. The intent of this new law is to standardize the local earned income tax system across the various municipalities – a change which is welcomed by many employers and accountants. Unfortunately, as with many changes, some effort will be required to implement the new law correctly.

One of the key changes in this new law is the requirement to collect a Residency Certificate Form for each employee which certifies the correct taxing authority for that employee. While completing the form it is necessary to perform an address search to determine the PSD code of the employee’s residency and the employer’s work address. These codes will be reported on your quarterly local earned income tax return. The results of the address search will indicate two tax rates. The first is the resident tax rate for the employee’s home address and the second is the nonresident tax rate for the employer’s address. The requirement is to withhold local taxes at the higher of these two rates.

One unfortunate result of this new tax law is how it impacts employees who reside outside of Pennsylvania but work within our state. Since the employer is required to withhold the higher of the nonresident rate (often 1%) or employee’s resident rate, even out-of-state employees will start paying local income taxes if they work within PA. Even worse, this local withholding is not subject to refund from the locality at the end of the year.

Feel free to contact our office for assistance with this new law.