Dealing With State, Local Taxes and Nonresident Employees


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Ohio, Pennsylvania, and Kentucky are three states that have local income taxes as well as state income taxes. Some municipalities in these states have several taxes they impose.

Pennsylvania has the most local income taxes of any state and several cities have local income taxes specific to them, said Bruce Phipps, CPP, principal product manager with Oracle.

In addition to the Local Services Tax, Pittsburgh has a city earned income tax, a school district earned income tax and a nonresident sports facility usage fee, Phipps said. The sports facility usage fee would be imposed on any professional player who is not a Pittsburgh resident and entertainers who used a venue such as Three Rivers Stadium, Phipps said May 18 at the annual American Payroll Association Congress in Orlando, Fla. 

Philadelphia has a city wage tax that is imposed on residents and nonresidents, Phipps said. Residents are subject to a tax of 3.9004 percent no matter where they perform their services, while nonresidents are subject to a tax of 3.4741 percent for services performed in the city, he said. Philadelphia’s tax is adjusted every July 1, he said.

Most municipalities in Pennsylvania impose a Local Services Tax, which is collected at an employer’s work location, Phipps said. Although the tax can range from $5 to $52 per year, with $52 being the maximum, four cities have a tax greater than $52, he said. Aliquippa’s tax is $104, while Harrisburg, Johnstown and Scranton each impose a tax of $156 a year, he said.

There are 625 municipalities in Ohio that levy a local income tax, said Robyn Maslouski, CPP, director of human resource services at Cardinal Health. These municipal taxes are imposed based on where an individual works, while school district taxes are imposed based on where an individual lives, Maslouski said May 19.

If an employee works in more than one location, taxes are withheld and prorated based on the time spent in each location, Maslouski said. Employers may, as a courtesy, deduct and withhold taxes at an employee’s request for the municipality in which the employee resides, she said. Courtesy withholding when the employer has no business connection to the municipality where the employee lives is not mandatory, she said.

The withholding threshold for occasional entrants to a municipality has increased to 20 days from 12, Maslouski said. Employers are not required to withhold municipal income taxes on wages paid to a nonresident employee who works in a locality for 20 or fewer days a year, but this rule does not apply to professional entertainers and athletes or their promoters, she said.

Many cities and counties in Kentucky impose an occupational license tax or fee, said Steve Hodgson, CPP, director of payroll training for APA. Every employer must withhold the license tax from each employee working in a city or county, and employees must pay both taxes if they work in a city located in a county that has its own tax, Hodgson said May 19.

Hodgson said there are five school districts in Kentucky that impose a school district occupational license tax on residents working in the county: Cumberland County schools, Fayette County schools, Marshall County schools, Scott County schools, and Warren County schools.

“Employers in Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia are not required to withhold Ohio state or school district income tax, so Ohio residents working in those states may need to file estimated school district income tax,” Maslouski said during an APA workshop.

An employer that fails to withhold school district income tax because an employee did not file or indicate his or her school district of residence on Form IT-4, Employee’s Withholding Exemption Certificate, may not be held liable as long as the employer acted in good faith in requesting the information, she said, citing a 2006 opinion letter from Ohio’s tax commissioner.

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