Payroll Taxes and Compliance in Pennsylvania
Paying your employees in Pennsylvania involves complying with many laws and calculating several taxes. Depending on where you’re based, the payroll taxes you pay and withhold can vary. But don’t worry—we’ll help you make sense of it all.
What are payroll taxes in Pennsylvania?
In Pennsylvania, both employees and employers are responsible for various state payroll taxes.
State income tax
For most employees in Pennsylvania, the 2022 state income tax rate is 3.07%. This is a flat tax rate that applies to all wages, no matter how much an employee earns.
The exception is if an employee resides in Indiana, Maryland, New Jersey, Ohio, Virginia, or West Virginia. In these situations, you don’t have to withhold the Pennsylvania state income tax. Instead, you’re required to withhold the other state’s income tax and pay that tax to the other state.
To help you determine which state’s tax to withhold, have employees complete the Employee’s Nonwithholding Application Certificate (Form REV-419 EX).Be sure to keep a copy for your payroll records as you may need to submit a copy to the Pennsylvania Department of Revenue. (See the “Responsibilities of Employer” section on Form REV-419 EX instructions for more information.)
Pennsylvania local wage taxes
Employees who live or work in Pennsylvania may also have to pay local wage taxes. Knowing what to collect and what to pay can be confusing, so have your employees complete the required Residency Certification Form. That will help you determine how much tax to withhold and where to remit those taxes.
Philadelphia Wage Tax
For example, Philadelphia charges a local wage tax on both residents and non-residents. For 2022, you must withhold 3.79% of earnings for employees who live in Philadelphia regardless of where they work. If your employees work in Philadelphia but reside elsewhere, you must withhold the non-resident rate of 3.44%.
Local Earned Income Tax (EIT)
Depending on where your employees live and where they work, you may also need to withhold earned income tax from employees’ wages. To calculate EIT withholding rates, you’ll need to compare your employee’s residence address EIT rate to their work location EIT rate. Whichever rate is higher is the one you withhold and send off to the tax collector of the work location. If this seems confusing, here’s some good news: you can enter your employee’s work and home addresses here to help you figure out the correct tax to withhold.
School district taxes
You may also need to withhold school district taxes if your employee lives in a school district that imposes an earned income tax on their residents. To find out if it’s the case for your employees, use this Pennsylvania local tax finder.
If your employee needs to pay both a local earned income tax and a school district tax, the tool will tell you how to split their taxes and how much tax to pay to each taxing authority.
Local Services Tax
Lastly, some communities also impose a Local Services Tax (LST) that is paid by all employees working in that community.
The LST is a flat tax and doesn’t change based on how much an employee earns. Usually, it’s an annual amount that gets divided by the number of pay periods in a year and is paid quarterly to the applicable tax authority. If the LST is $10 or less, you can withhold the entire amount at the start of the year or when the employee begins working. See if you need to withhold LST from your employees by checking here.
Employee- and employer-paid taxes
Pennsylvania Unemployment Compensation
While the other taxes are employee-paid, Pennsylvania requires both you and your employees to pay for Unemployment Compensation (UC) tax.
For 2022, employers pay the tax on the first $10,000 of each employee’s earnings each year. The tax rate is specific to your business. Toward the end of each calendar year, your company will receive a notice (Form UC-657) with your rate for the subsequent year.
If you’re a new employer in Pennsylvania, you’ll be assigned a new employer rate. If you’re in the construction field, you’ll pay a 2022 UC rate of 10.2238%. New non-construction employers pay 3.6890% in 2022. This new employer rate typically applies for two to three years before your rate may be adjusted.
For employees, you must also withhold 0.06% of their wages in 2022. There is no wage limit for employee withholdings when it comes to the Pennsylvania Unemployment Compensation tax.
What about federal payroll taxes?
In addition to state payroll taxes, below are the key federal payroll taxes that all employers must pay or withhold from employees’ earnings.
Federal income tax
The amount of federal income tax to withhold from each employee’s wages is based on the information in their Form W-4. Details such as filing status and income will determine how much tax you should withhold.
Additional Medicare tax
Depending on an employee’s tax filing status, they may also be subject to this 0.9% tax. In 2022, you must withhold this tax on any wages you pay an employee beyond $200,000 per year.
FUTA, or federal unemployment tax
Like the state, the federal government also has an unemployment tax. It’s called FUTA and it’s an annual tax employers pay on the first $7,000 of each employee’s wages. The FUTA rate for 2022 is 6%, but many employers only have to pay 0.6% each year.
Employee- and employer-paid taxes
FICA, or Federal Insurance Contributions Act tax
The Federal Insurance Contributions Act, or FICA tax, is made up of the Medicare tax and the Social Security tax. In 2022, the Social Security tax requires employers and employees to each contribute 6.2% of wages up to $147,000. The Medicare tax requires each to contribute 1.45% of all wages. See the IRS webpage for details, like maximum thresholds.
Anything else about Pennsylvania paychecks that I need to know?
Yep. Here are some other laws and requirements that you should keep in mind.
Minimum salary threshold
Because the state of Pennsylvania doesn’t have its own salary threshold, it adheres to the federal salary threshold, which is now $684 per week (equivalent to $35,568 per year for a full-year worker). The Department of Labor permits employers to count some bonuses, commissions, and other incentive payments toward meeting the standard salary level (up to 10%). Employees who earn at least $107,432 per year may qualify as “highly compensated.” See this Department of Labor fact sheet for details.
Hiring new employees
When you hire a new employee, you must notify them of the following:
- the time and place where paychecks will be issued
- their rate of pay
- the amount of contributions paid on the employee’s behalf (e.g., pension plan contributions or union dues)
You must also inform Pennsylvania’s Commonwealth Workforce Development System of any new hires within 20 days of hire or rehire.
Providing pay stubs
When payday comes around, employers must provide employees pay stubs that include:
- beginning and ending dates of the pay period
- number of hours worked
- rate of pay
- gross wages
- tax deductions
- other authorized deductions (if applicable)
Paying independent contractors
If you pay independent contractors who don’t live in Pennsylvania more than $5,000 a year, you must withhold 3.07% state income tax.
There is no Pennsylvania statewide law requiring employers to give sick pay. The exception is if an employer has a policy or contract to provide it.
However, all employers that have employees who work within Philadelphia city limits and have ten or more employees must provide paid sick time to employees. Employers with fewer than ten employees must provide unpaid sick time.
The current rate is one hour of sick time for every 40 hours worked. You must provide this sick time benefit to any employee who works more than 40 hours a year in Philadelphia.
The last paycheck
When an employee leaves your business for any reason, you must provide their final paycheck on the next regularly scheduled pay date.
Requirements to obtain Workers’ Compensation vary by state, this table outlines some of these requirements. If you determine that your company is required to purchase Workers’ Compensation insurance in your state, learn how to sign up for this insurance with Gusto. Sometimes, companies get a request for a workers’ comp audit—head to this article and click the workers’ comp audit reports dropdown for more information.
Pennsylvania’s payroll taxes are among the country’s most complicated. If you’ve decided you want more help, a payroll service or experienced accountant can lend a helping hand.
The information provided by the Employer Tax Calculator is for general information and estimation. All of the taxes or fees that apply to your business may not be accounted for, or fully up to date. Gusto, Inc. (dba “Gusto”) does not promise or guarantee that the information in the Employer Tax Calculator is accurate or complete, and Gusto expressly disclaims all liability, loss or risk incurred by employers or employees as a direct result or an indirect consequence of its use. By using the Employer Tax Calculator, you waive any rights or claims you may have against Gusto in connection with its use.