How do I set up Local ACT 32 Taxes for Pennsylvania?

Act 32 is a Pennsylvania Law that streamlines and standardizes the local earned income tax system. It consolidates the process by creating new tax collection districts, standardizing forms and mandating employer withholding starting in 2012.

CAUTION: 

Note: This solution requires you to be using:

• Sage 300 Construction Version 18.4 Accounting Update 4 or later

Changes for Pennsylvania local tax setup should only be applied to checks issued after January 1, 2012 to avoid incorrect 2011 YTD totals.

Starting January 1, 2012 Pennsylvania requires employers to withhold the higher of the employee's resident earned income tax amount or employee's municipal non-resident earned income tax amount unless the tax district is Philadelphia.

Act 32 Definitions
Act 32 reduces Pennsylvania's number of Earned Income Tax (EIT) collectors from 560 to 21. The appointment of collection responsibility falls on countywide committees made up of representatives from local municipalities and school districts. The committees established tax collection districts and elected tax officers to collect the EIT. Act 32 requires uniform withholding of earned income taxes and remittance to a single local collector or Tax Officer.

a) All employers, located in Pennsylvania, must withhold the non-resident tax rate for employees living outside of Pennsylvania, if one exists.
b) For employees living within Pennsylvania, the employer is required to withhold at the higher rate of either the employee's resident rate or the non-resident rate in which the employer (job) is located.
c) Employers located in political subdivisions who do not have a tax in place will be required to withhold taxes for all employees who are residents of Pennsylvania who have a resident tax for the locality in which they live and remit them to the Tax Officer.
d) Philadelphia has special rules. See Below.

Follow the sections listed below to set up Payroll to calculate the Pennsylvania local taxes:

Tax Rate Setup

Tax Group Setup

Employee Setup

Job Setup

Tax Calculation Examples

Recalculate Subject-to Considerations

Tax Rate Setup

A separate tax rate must be created for each PSD code that your employees reside or work in. Follow the steps below to set up the new tax rates.

Important: A new tax rate must be set up for each PSD code. Do not re-use existing tax rates as this will cause Tools, Recalculate Subject-to to populate your employee totals with incorrect numbers.
Once a tax rate for a comparison tax has been set up and checks have been posted for that tax do not change the tax type as this will cause Tools, Recalculate Subject-to to populate your employee totals with incorrect numbers.

1. In Payroll choose Setup,Taxes,Tax Rates.
2. Enter a new Tax ID and description for the PSD code.
3. Choose the Local Tax Level and a Tax Type of Comparison.
4. In the State Code box type "PA".
5. Enter a Printed Description. This description will appear on the employees check stub.
6. Enter the Resident tax rate, and the Non-Resident tax rate in the appropriate boxes.
7. You may enter a Local tax code and description in the respective boxes. These boxes are available for use in custom reports and do not affect the tax calculation, or appear on any current reports.
8. Click Save and repeat steps 1-8 for the remaining PSD codes. Only set up one Tax ID per PSD code, it is not required to set up separate Tax IDs for the Resident and Non-Resident taxes.

Tax Group Setup

A separate tax group must be created for each tax collection district that your employees reside or work in. If you already have a tax group created for the district or PSD code you must create a Tax group for the PSD code. Follow the steps below to set up a new tax group.

Important: The tax group for the PSD code should only contain one Tax ID with a Tax Type of Comparison.

1. In Payroll choose Setup,Taxes,Tax Groups.
2. Click Local under the Tax level.
3. Enter a Tax Group ID and a Description for the tax district.
4. Tab to the Tax ID column and click List to choose the tax ID you created for the PSD code. Only one tax ID with a Tax Type of Comparison should be used for this tax group.
5. Click Accept table and repeat steps 1-3 for the remaining PSD codes Groups.

Important: Reciprocal agreements between tax groups are not required for the Pennsylvania local tax calculations to work.

Employee Setup

Complete the following steps for each employee who:

• Resides in Pennsylvania
  OR
• Works in Pennsylvania and the work location is not defined on the Job setup in Job Cost.

1. In Payroll choose Setup,Employees and type in the Employee ID.
2. Choose the Entry Info tab.
3. If the employee resides in a Pennsylvania tax collection district click the Residence Local box and then click [List] to select the appropriate tax group for the PSD code for that address.
4. If your company is based in a Pennsylvania tax collection district click the Work Local box and then click [List] to select the appropriate tax group for the PSD code the company is based in.
   Note: Depending on where your employee lives and where the company is located, you may have to enter one or both.
5. Click Save
6. If the employee resides in Pennsylvania, click the State button.
7. Type "PA" in the State box
8. Type the employee's residence PSD code in the Misc tax Code 2 box.
9. Click Accept and then Close.
10. Repeat steps 1-5 for each employee that meets the conditions above.

Job Setup

Complete the following steps if:

• Your company is not based in Pennsylvania but the Job is in a Pennsylvania tax collection district and you are required to withhold the local tax.
  OR
• Your company is based in Pennsylvania and the Job PSD code should be withheld instead of the PSD code for the address your company is based in.

1. In Job Cost, choose Setup,Jobs.
2. On the Scope, PR and EQ tab click in the Local box and click [List] to select the appropriate tax group.
3. Click Save.
4. Repeat steps 1-3 for each job that meets the conditions above.

How Pennsylvania Local Taxes will Calculate

If Payroll is set up for Pennsylvania locals as outlined above, Pennsylvania taxes will calculate as outlined in the scenarios below. The evaluation will occur for each line of time entered on a check.

An Employee Resides in a Pennsylvania tax district but the work district is not within Pennsylvania:

• In the employee setup a Pennsylvania PSD code tax group is included in the Residence Local box.
  AND
• A Pennsylvania PSD code tax group is not included in the employee setup in the Work Local box.
  AND
• A Pennsylvania PSD code tax group is not included in the job setup on the Local box.

The resident tax will be calculated for the line of time as normal.

An Employee works in a Pennsylvania tax district but do not reside in Pennsylvania:

• In the employee setup a Pennsylvania PSD code tax group is not included in the Residence Local box.
  AND
• A Pennsylvania PSD code tax group is included in the employee setup in the Work Local box.
  OR
• If a job is listed on the line of time, a Pennsylvania PSD code tax group is included in the job setup on the Local box.

The non-residence tax will be calculated for the line of time as normal.
Note: If a tax group is listed on both the job and employee setup the normal hierarchy applies where the local on the job setup takes precedence over the work local on the employee setup.

An Employee works in a Pennsylvania tax district (not Philadelphia) and resides in Pennsylvania (not Philadelphia):

• In the employee setup a Pennsylvania PSD code tax group is included in the Residence Local box.
  AND
• A Pennsylvania PSD code tax group is included in the employee setup in the Work Local box.
  OR
• If a job is listed on the line of time, a Pennsylvania PSD code tax group is included in the job setup on the Local box.

The tax that calculates for the line of time is based on which of the following Resident/Non-Resident tax rates are higher in Setup,Taxes,Tax Rates:

The Resident Rate of the tax associated with the tax group included in the Residence Local box on the employee setup.
Or
The Non-Resident Rate of the tax associated with the tax group that is on the line of time (either the Local on the job setup or the Work Local on the employee setup).

Philadelphia Resident and Non Resident taxes:

Philadelphia Resident and Non Resident taxes are not part of the Act 32 Local tax process. Setup both the Resident and Non Resident Philadelphia taxes and place them into the Philadelphia Tax group.

1. In Payroll choose Setup,Taxes,Tax Rates.
2. Enter a new Tax ID and description. (IE. PHILA RES and Philadelphia Resident for the Resident tax. PHILA NONR and Philadelphia Non Resident used for the Non Resident tax.)
3. Choose the Local Tax Level and a Tax Type of Resident.
4. In the State Code box type "PA".
5. Enter a Printed Description. This description will appear on the employees check stub.
6. Enter the Resident tax rate.
7. You may enter a Local tax code and description in the respective boxes. These boxes are available for use in custom reports and do not affect the tax calculation, or appear on any current reports.
8. Click Save and repeat steps 1-7 for the remaining Philadelphia Non Resident Local Tax. The Non Resident tax type must be selected.

Place both taxes into a Local Tax Group:

1. In Payroll choose Setup,Taxes,Tax Groups.
2. Click Local under the Tax level.
3. Enter a Tax Group ID and a Description for the tax district. (IE. Phila Local)
4. Tab to the Tax ID column and click List to choose both Philadelphia taxes you created.
5. Click Accept table and close.

Considerations for Philadelphia taxes. ( https://dced.pa.gov/local-government/local-income-tax-information/local-withholding-tax-faqs/)

An Employee works in Philadelphia and resides in Philadelphia:

• In the employee setup the Philadelphia tax group is included in the Residence Local box.
  AND
• The Philadelphia tax group is included in the employee setup in the Work Local box.
  OR
• If a job is listed on the line of time, the Philadelphia tax group is included in the job setup on the Local box.

The Philadelphia Resident local tax will calculate.

Employees who work in Philadelphia, but live outside of Philadelphia

• The Philadelphia tax group is included in the employee setup in the Work Local box.
  OR
• If a job is listed on the line of time, the Philadelphia tax group is included in the job setup on the Local box.

The Philadelphia Non Resident tax will calculate. If this employee also lives in an ACT 32 Locality, this tax will also calculate.

Employees who live in Philadelphia, but work in PA outside of Philadelphia.

In the employee setup the Philadelphia tax group is included in the Residence Local box.

The Philadelphia Resident tax will calculate. If there is Work Local Tax group on the time record, this tax will also calculate.

Act 32 Taxes do not reduce the Philadelphia taxes due, the Act 32 rules do not apply. Employers are required to withhold the Philadelphia resident rate for employees who live in Philadelphia, but work outside of Philadelphia.

Consult your local tax professional for questions regarding other local tax calculations.

Recalculate Subject-To

Tools,Recalculate Subject-to functionality remains the same except in the case where a comparison tax rate is changed. If no local tax rates have changed, and if no employee resident locals have changed, recalculate subject to will run normally. If a rate or employee resident local was changed during the year, please contact support, or your consultant.

Important: If the Resident Local changes for an employee mid-year, recalculating subject-to will use the new Resident Local Tax Group in the comparison tax calculation to determine the rate on all the checks for the year. If an employees Residence Local changes mid-year do not use recalculate subject-to for that employee.

Local Services Tax:

If you are withholding the Local Services tax, add the tax to each tax Pennsylvania local tax group.

Reporting the Act 32 taxes on the W2 or the Quarterly Act 32 reports:

You will need to link the Act 32 taxes to your Aatrix company setup. (KB 21599).

1. From the Payroll Tasks menu, select Federal eFile and Reporting or State eFile and Reporting.
2. Click Link Aatrix Tax Types.
3. Click the asterisk button, (*) to create a new Aatrix tax group.
4. Enter a Group ID and Description.
5. Select PA as the State and Tax Description.
   Note: Only set up one tax group per description. Link all local tax IDs to this group. This is usually your tax administrator, you may have to setup more than one if your report your Local taxes to different Administrators.
6. Enter your Employer ID for the tax group.
7. Select the radial button to Sum All Subject-To Amounts or Use Highest Subject-To Amount.
8. From the list of local taxes, select the taxes that apply to the tax group and click the button with the ">".
   Note: Link all of the local tax IDs that apply to this group.
9. Click Save.

Repeat steps 1-8 to add another local tax group.