Pennsylvania employers face more compliance issues than those in other states, particularly regarding local service taxes (LST) and earned income taxes (EIT). These requirements are part of a larger system of payroll taxes that Pennsylvania employers are responsible for withholding and remitting.
This guide provides a comprehensive overview of LST and EIT, outlining key aspects, updates for 2024, and best practices for managing tax compliance issues. Here’s what you need to know and how Mosey can help with business compliance.
How Does Payroll Tax Work in Pennsylvania?
Payroll tax is a hefty component of Pennsylvania’s tax system, impacting both employers and employees. It refers to taxes that employers are required to withhold from employees’ wages and pay to the local, state, and federal governments. In Pennsylvania, this includes several specific taxes:
State Income Tax
Pennsylvania imposes a flat state income tax rate on personal income. As of 2024, the rate is 3.07%.
Employers are responsible for withholding this tax from employees’ wages and remitting it to the Pennsylvania Department of Revenue. This tax applies to all forms of compensation, including salaries, wages, and bonuses.
Local Earned Income Tax (EIT)
In addition to the state income tax, Pennsylvania municipalities and school districts can levy their own earned income taxes. These taxes are typically a percentage of an employee’s earnings and can vary significantly by location.
Employers must withhold these taxes from employees working within a municipality or school district that imposes the EIT.
Local Service Tax (LST)
Local governments apply local service tax to individuals who work within their jurisdictions. The LST is generally a flat annual fee, though it can vary by locality. Employers must withhold this tax from employees’ wages and forward it to the appropriate local tax authority.
Unemployment Compensation Tax
Pennsylvania employers are also responsible for paying unemployment compensation taxes. This tax funds the state’s unemployment insurance program, which provides benefits to workers who lose their jobs through no fault of their own. The rate employers pay varies based on their history of unemployment claims and the size of their payroll.
Workers’ Compensation Insurance
While not a direct tax, Pennsylvania mandates that employers provide workers’ compensation insurance. This insurance covers medical expenses and lost wages for employees injured on the job. Employers pay premiums based on their business’s risk classification and total payroll.
Filing and Payment
Employers must accurately calculate and withhold these taxes from each paycheck. They are responsible for periodically remitting these withholdings to the respective state or local tax authorities. Payroll compliance involves both monthly and quarterly filings.
For state income tax, Pennsylvania employers generally use the Pennsylvania Online Business Entity Registration (PA-100) to manage their withholding accounts. The Pennsylvania Department of Revenue provides online services for employers to file and pay these taxes. You can automate this state tax account registration process for payroll accounts in Pennsylvania through Mosey.
Local earned income and service taxes are administered by local tax collectors and can vary by municipality. Mosey can automate registration for local Pennsylvania EIT and LST taxes as well, providing you the easy way to do compliance.
What Is Local Service Tax (LST) in Pennsylvania?
The local service tax (LST), sometimes called the municipal service tax (MST), is a tax imposed by municipalities in Pennsylvania on individuals working within their jurisdiction. This tax funds local and necessary services like police, fire protection, and road maintenance. Some municipalities use LST funds for things like property tax relief.
Each municipality can enact new income taxes to help them meet their needs. There are variations of LST and MST across the country, and the responsibility rests primarily on employers to ensure the appropriate amount for each tax is deducted from an employee’s paycheck and remitted to the proper authority.
Local service tax is separate from state and federal income taxes and specific to local government needs. Local governments are allowed to appropriate LST funds however they feel would be most beneficial to their communities.
Who Is Subject to Local Service Tax in Pennsylvania?
LST applies to all employees working within the municipality that has enacted the tax. This includes full-time and part-time employees, residents or nonresidents who work within a specific municipality, and self-employed individuals, contractors, and sole proprietors who work within an LST municipality.
What Are the Pennsylvania Local LST Rates and Exemptions?
The rate for LST can vary significantly between municipalities. Generally, the maximum rate allowed by Pennsylvania law is $52 annually, though local ordinances can set lower rates. Some municipalities may impose a flat rate, while others might use a tiered approach based on income level.
Certain groups are exempt from LST, including:
- Individuals earning below a specified threshold, typically set by the municipality (e.g., those earning less than $12,000 annually).
- Members of the armed forces on active duty.
- Individuals working in certain types of employment, such as religious or charitable work, depending on local regulations.
Administration and Payment
Employers are responsible for withholding LST from employees’ paychecks and remitting it to the appropriate local tax collector. This requires maintaining accurate records of each employee’s work location and calculating the correct amount of tax to withhold.
You may be responsible for withholding and remitting different tax amounts for each employee, depending on where they live and how they work. Payments are generally due quarterly, though this can vary by municipality. Employers should know local deadlines to avoid penalties and interest on late payments.
What Is Earned Income Tax (EIT) in Pennsylvania?
Earned income tax (EIT) is a tax on wages, salaries, and other compensation earned by employees and independent contractors. Unlike LST, EIT is managed at both the state and local levels. EIT funds are intended to provide funding for local services and infrastructure.
Who Is Required To Pay EIT in Pennsylvania?
EIT applies to employees who earn wages or salaries and self-employed individuals who generate income from a business. This is an important distinction — personal and business income are different, and the line can be blurry for self-employed individuals. EIT only applies to business income. We recommend speaking with a tax professional on how to correctly identify business income that includes both wages (earned income) and net profits from self-employment.
Similar to LST, residents and non-residents of a municipality may be subject to EIT if they work within its boundaries or zip code. EIT also applies to income earned by residents even if they work outside their municipality.
What Are the Pennsylvania EIT Rates and Credits?
EIT rates vary by municipality, with local tax rates ranging from 0.5% to 3% of earned income. This amount can change every tax year. It’s important to check frequently for changes to required withholding amounts, as they generally rise annually.
Many municipalities offer tax credits to avoid double taxation. For instance, if an employee works in a municipality with a high EIT rate but resides in one with a lower rate, they might be able to claim a credit for taxes paid to their work municipality against their resident tax liability.
Administration and Payment
Employers typically withhold EIT from employees’ paychecks, similar to federal and state income taxes. For self-employed individuals, EIT payments are made through estimated quarterly payments.
Employers must file EIT withholding reports and remit the collected taxes to the local tax collector. Filing deadlines are usually quarterly, but some municipalities accept them annually. Employers should stay updated on local requirements to ensure timely and accurate reporting.
What Should Employers Know About Local LST and EIT in 2024?
Taxes and compliance requirements often change annually. Withholding rates tend to go up over time, even if the increases are only slight. Along with rate increases, it’s normal to see new exemptions and tax credits that change your responsibilities for withholding and remitting taxes for certain eligible employees.
Changes in Tax Rates Across Most Municipalities
Several municipalities have adjusted their LST and EIT rates for the 2024 tax year. Employers must review local ordinances to ensure compliance with the latest rates. Some municipalities may have increased rates to address budgetary needs, while others might have reduced them due to surplus funds or economic conditions. Increases are more common than decreases.
Revised Exemptions and Credits
Updates to exemptions and credits can impact tax liabilities. For example, some municipalities have increased income thresholds for LST exemptions or expanded credits for EIT to support economic recovery after the pandemic. Employers should check for changes in local ordinances affecting exemption thresholds and available credits.
Administrative and Reporting Changes
The Pennsylvania Department of Revenue has introduced new reporting requirements for 2024 to streamline the tax collection process. These changes include enhanced electronic filing options and updated forms for LST and EIT.
Electronic filing is generally much easier, and the overwhelming majority of businesses use electronic services for bookkeeping. It may be simpler for you to import information and generate electronic forms.
What Are the Best Practices for LST and EIT in Pennsylvania?
State and municipal taxes place additional responsibilities on employers, especially multi-state employers. Pennsylvania employers must make special considerations for LST and EIT taxes when they apply to their workforce.
Maintain Accurate Records
Accurate recordkeeping is one of the most important parts of managing LST and EIT. You should maintain detailed records of employees’ work locations, earnings, and taxes withheld. Accurate recordkeeping leads to accurate reporting, and detailed records can help resolve any discrepancies that may arise during audits.
Stay Updated on Local Tax Regulations
Local tax regulations can change frequently. You should regularly review updates from local tax authorities and subscribe to relevant newsletters or updates. Engaging with local tax advisors or payroll service providers can also help ensure compliance with the latest requirements.
Utilize Payroll and Compliance Software
Investing in reliable payroll software can streamline withholding and remitting of LST and EIT. Many payroll systems are equipped to handle multiple local tax rates and update automatically with changes in tax laws.
Mosey’s compliance management platform can help you track payroll taxes and local compliance issues that impact your payroll. You can verify compliance requirements, automate registration for new tax accounts, and enter the account numbers into your payroll software.
Educate Your Team
Ensuring your HR managers and payroll team are well-versed in LST and EIT regulations is crucial. Regular training sessions and updates on tax changes can prevent errors and ensure your team is prepared to handle any issues. Make sure that employees understand that situations may arise where employees have different withholding rates.
Work With a Local Tax Professional
Consulting with tax professionals who specialize in local taxes can provide valuable insights and assistance. These professionals can help you maintain compliance with local regulations and optimize your tax strategy.
Stay Compliant With Mosey
Pennsylvania employers are required to comply with a significant number of payroll tax requirements, each with different compliance stipulations.
Local LST and EIT payroll taxes are just two of the many considerations employers and bookkeepers must make when establishing their organization’s payroll systems. Compliance can be very demanding for many small to medium-sized businesses, but it doesn’t have to be.
Mosey’s compliance automation allows employers to track state-specific business requirements through a single dashboard. Our tools help you stay on top of small details while you work to help your business reach its full potential.
Book a consultation with Mosey to learn how our tools can help Pennsylvania employers track PA Local LST and EIT payroll taxes.
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