How do I set up Pennsylvania local taxes?

In in this video tutorial series on Pennsylvania local taxes, we’ll look at setting up new work locations, configuring TRUs or PSUs to withhold for residents working outside of PA, configuring the TCD combined filing proxy, the Pennsylvania/Maryland reciprocity agreement, and verifying and correcting the PSD code for new employees.

Before beginning to work with Pennsylvania local taxes, you must run the Load Payroll Tax Information for US process. This process allows the political subdivision, or PSD, codes to become available for use in the application.

When using the Location task to set up a new work location, it’s important to enter the correct PSD code associated with the location’s taxation jurisdiction. Leave this field blank for non-Pennsylvania locations and for locations with Philadelphia taxation. Philadelphia is not part of PA Act 32. You’ll also want to leave the nonresident EIT rate field blank, as this field is not currently used.

Once you’ve entered a PSD code for a work location, all new hires who are assigned to that location will have that PSD code automatically populated on their employee PA Residency Certificate record.

If you want to withhold local taxes for Pennsylvania residents who work outside of Pennsylvania as a courtesy, you’ll need to configure your PSU or TRU calculation cards. Configurations at lower levels override configurations at higher levels. For the State Income Tax calculation component on the Enterable Calculation Values on the Calculation Cards tab, you’ll need to manually add the Calculate PA Resident Tax for Non-PA Work Location calculation value with a value of ‘Yes’.

If you’re registered as a combined filer for PA Act 32, you’ll need to configure your tax collection district proxy on the PSU or TRU calculation cards. Configurations at lower levels override configurations at higher levels. This designation should not be changed mid-year. Confirm that your tax filing vendor supports this filing before configuring.

For the State Income Tax calculation component on the Enterable Calculation Values on Calculation Cards tab, you’ll need to manually add the TCD Combined Filing Proxy calculation value with the designated proxy value. This example shows a proxy value of 67 for York Tax Collection District.

Once set, the payroll process populates this value in run results for the Tax Collection District Code on the City Tax elements and Local Wages and Taxes elements. If you’re not a combined filer, no configuration is required. The payroll process populates the Tax Collection District Code in run results according to PA Act 32 requirements.

It's important to keep in mind the reciprocity agreement for local taxation between Pennsylvania and Maryland. These Pennsylvania Tax Collection Districts, or TCDs, allow an exemption from nonresident tax for Maryland residents. There can be exceptions. Refer to the Vertex Calculation guide for the list of local tax districts within these TCD codes that allow an exemption.

When an employee lives in Maryland and works in Pennsylvania the payroll process will not withhold Pennsylvania local taxes where appropriate, as long as:

1. You’ve entered 880000 for the home PSD code in the Pennsylvania Residency Certificate section on the employee tax card.

2. The employee has the correct work PSD code that pertains to one of these tax collection districts in the Pennsylvania Residency Certificate section of the employee tax card.

3. You’ve entered a value of “Yes” for the Pennsylvania Nonresident flag on the employee tax card.

When an employee works in Maryland, and lives in Pennsylvania the payroll calculation will appropriately withhold Maryland local taxes unless the employee lives in York or Adams counties, or lives in a local Pennsylvania jurisdiction that doesn’t impose earnings or income tax on Maryland residents. Pennsylvania residents aren’t subject to Maryland state taxes. Consider the following:

You’ve optionally configured your PSU or TRU to withhold Pennsylvania local taxes for employees working outside of Pennsylvania.

You’ve correctly set up the employee’s withholding certificate in the Residency Certificate section of the tax card.

You’ve marked the person as Nonresident for Maryland on their Maryland Regional tax card.

After you hire an employee, you’ll want to make sure the employee’s Residency Certificate has the correct PSD code and school district populated for both the resident and work fields. The system will automatically populate the PSD code and school district for the resident fields based on the home address city, but that information may not be accurate because Pennsylvania addresses often have varying taxation jurisdictions.

The system will also automatically populate the PSD code and school district for the work fields based on the information you entered when setting up your work location.

You’ll need to update or correct this information accordingly. If an employee claims exempt from city tax or school tax specifically for PA Act 32, these fields on the Pennsylvania PSD residency certificate should be set. Please note that this exemption should not be set on the individual city tax calculation component.

To verify the correct PSD code, go to the Pennsylvania Municipal Statistics website and click the Taxes link to find local withholding by address.

Once you’re sure the Resident PSD code and school district are correct, the payroll process will withhold the higher of the resident rate (city + school) or the non-resident rate (city only). In cases where the rate is the same, the system will automatically withhold the resident tax. Be sure to watch Maintaining Pennsylvania Local Taxes, where we’ll look at entering a PSD code using employee self-service, performing ongoing maintenance, and viewing run results to confirm accurate withholding. Thanks for watching.