What Is Considered Earned Income For Pa Local Tax? Earned income for PA local tax encompasses compensation for services rendered, and income-partners.net can help you navigate these tax implications effectively. Understanding what qualifies as earned income, and exploring partnership opportunities is crucial for optimizing your financial strategy.
1. Understanding Earned Income for Pennsylvania Local Tax
What exactly constitutes “earned income” when it comes to Pennsylvania’s local taxes? This is a vital question for anyone living or working in the state.
What is considered earned income for PA local tax? Earned income for Pennsylvania local tax includes wages, salaries, tips, and net profits from businesses. This is defined under Section 303 of the Tax Reform Code of 1971. Let’s break down this definition and explore its implications.
1.1. Defining Earned Income Under the Tax Reform Code of 1971
The Tax Reform Code of 1971 provides the foundation for understanding what qualifies as earned income in Pennsylvania. It is essential to consult this code, and related regulations (61 PA. Code Pt. I subpt. B. Art. V), to ensure compliance with local tax laws.
Wages, Salaries, and Tips
These are the most common forms of earned income. They represent compensation received by an employee for services performed. This includes not only base pay but also bonuses, commissions, and other forms of remuneration.
Net Profits from Businesses
If you’re self-employed or own a business, the net profits you derive from that business are considered earned income. This is calculated as your gross income minus allowable business expenses.
1.2. Allowable Deductions: Employee Business Expenses
The Tax Reform Code of 1971 also allows for certain deductions related to employee business expenses. These deductions can reduce the amount of your earned income that is subject to local tax.
What Expenses Qualify?
Employee business expenses typically include unreimbursed costs related to your job, such as:
- Travel expenses: Including transportation, lodging, and meals.
- Home office expenses: If you use a portion of your home exclusively for business.
- Supplies and equipment: Necessary for your job.
- Professional development: Such as courses or seminars.
1.3. Special Cases: Farming and Clergy Housing Allowances
There are specific exemptions for taxpayers engaged in farming and clergy members receiving housing allowances.
Farming Income Exemptions
For farmers, the following types of income are not considered earned income:
- Interest earnings from monetary accounts or investment instruments of the farming business.
- Gains from the sale of farm machinery.
- Gains from the sale of livestock held for draft, breeding, or dairy purposes for at least 12 months.
- Gains from the sale of other capital assets of the farm.
Clergy Housing Allowances
Housing allowances provided to members of the clergy are also exempt from local earned income tax.
2. What Income is Specifically Exempt from the Earned Income Tax?
Knowing what doesn’t count as earned income is just as important as knowing what does. Several types of income are specifically exempt from the earned income tax in Pennsylvania.
What income is specifically exempt from the earned income tax? Income that is specifically exempt from the earned income tax includes dividends, interest, income from trusts, bonds, insurance proceeds, and stocks. Let’s examine these exclusions in more detail.
2.1. Investment Income: Dividends, Interest, and Stocks
Investment income is generally not considered earned income. This includes dividends from stocks, interest from savings accounts or bonds, and gains from the sale of stocks or other investments.
Why is Investment Income Exempt?
Investment income is typically considered passive income, meaning it is not directly tied to the provision of services or active participation in a business.
2.2. Payments for Benefits: Disability, Retirement, and Social Security
Certain types of payments received as benefits are also exempt from earned income tax.
Disability Benefits
Payments received as disability benefits are not considered earned income. These benefits are intended to provide financial support to individuals who are unable to work due to a disability.
Old Age Benefits, Retirement Pay, and Pensions
Similarly, old age benefits, retirement pay, and pensions are generally exempt from earned income tax. However, there are exceptions for early distributions, which we’ll discuss later.
Social Security Payments
Social Security payments are also exempt from local earned income tax.
2.3. Public Assistance and Unemployment Compensation
Payments received as public assistance or unemployment compensation are not considered earned income. These benefits are designed to provide temporary financial support to individuals in need.
2.4. Military Pay
Wages or compensation paid by the United States for active service in the armed forces are exempt from local earned income tax. This includes bonuses or additional compensation for such service.
Active Duty Pay Taxation Changes Over the Years
- 2016 and forward: Active duty military pay is exempt from taxation, regardless of where it was earned.
- 2012-2015: Active duty military pay is taxable if earned in PA but not taxable if earned outside of PA.
- 2011 and prior: Active duty military pay is exempt from taxation, regardless of where it was earned.
2.5. Supplemental Unemployment Compensation
Supplemental unemployment compensation from employers or unions is also exempt from local earned income tax.
2.6. Clergy Housing Allowance
As mentioned earlier, housing allowances provided to members of the clergy are not taxable as earned income.
3. Understanding Early Distributions from Retirement Accounts
What happens if you take money out of your retirement account before you’re supposed to? This is where the concept of “early distributions” comes into play.
Early Distribution: If you have taken an Early Distribution (prior to age 59 ½ or via allowed exception) from a retirement account, the portion that is taxable to the Commonwealth of Pennsylvania, is also taxable for local purposes. Let’s explore this topic in more detail.
3.1. What is an Early Distribution?
An early distribution is a withdrawal from a retirement account before the account holder reaches a certain age, typically 59 ½. These distributions may be subject to penalties and taxes.
Why are Early Distributions Treated Differently?
Retirement accounts are designed to encourage long-term savings for retirement. To discourage early withdrawals, the government imposes penalties and taxes on distributions taken before the designated age.
3.2. Tax Implications of Early Distributions in Pennsylvania
In Pennsylvania, the portion of an early distribution that is taxable to the Commonwealth is also taxable for local purposes. This means that if you include an early distribution on Line 1 of your PA-40 form as compensation, you must also include it locally.
Consult with a Tax Professional
Given the complexities of early distribution taxation, it is always a good idea to consult with a tax professional for personalized guidance.
4. Navigating Out of State Tax Credits
If you work in one state but live in another, you may be eligible for out of state tax credits.
Out of State Tax Credits There has been a change in the taxes to which Out of State Tax credits may be applied to taxes due for Tax Year 2012 and forward. Let’s break down the rules.
4.1. Changes in Out of State Tax Credit Application
There have been changes over the years regarding how out of state tax credits can be applied to taxes due in Pennsylvania.
Out of State Credits for 2012 through 2017
For these years, out of state credits may only be applied to the Act 511 tax rate (typically 1%) levied by your municipality or school district. The credit cannot be applied to taxes levied for the Acquisition of Open Space (Act 153) or the elimination of an Occupational Assessment Tax (Act 24/130).
Out of State Credits for 2011 and Prior and 2018 and Forward
For these years, out of state credits may be applied to the full tax rate levied by your municipality or school district. The exception is in school districts that have levied a tax under Act 1 of 2007.
4.2. Understanding Act 511, Act 153, and Act 24/130
These Acts refer to specific laws in Pennsylvania that govern local taxation.
Act 511
This Act allows municipalities and school districts to levy certain taxes, including the earned income tax.
Act 153
This Act allows municipalities to levy taxes for the acquisition of open space.
Act 24/130
These Acts allow municipalities to eliminate the occupational assessment tax.
4.3. The Impact of Act 1 of 2007
Act 1 of 2007 introduced changes to the way school districts can levy taxes. If you live in an area that levies a tax under this Act, it may affect how you can apply out of state tax credits.
5. Residency and Withholding: Where Do You Pay Your Taxes?
Residency is a key factor in determining where you pay your local earned income taxes.
If the tax is withheld in another PA community where I work, do I also pay the PA District in which I live? No. Generally, the tax withheld by your employer will be remitted to your resident jurisdiction. However, you are still required to file an annual tax return with your resident taxing jurisdiction. Let’s take a closer look at this.
5.1. Withholding and Resident Jurisdiction
Generally, the earned income tax is withheld by your employer and remitted to your resident jurisdiction. This means that if you live in one Pennsylvania community but work in another, the tax withheld from your paycheck will typically go to the community where you live.
5.2. Filing an Annual Tax Return
Even if your employer withholds the correct amount of tax and remits it to your resident jurisdiction, you are still required to file an annual tax return with that jurisdiction. This allows you to reconcile your income, deductions, and withholdings and ensure that you have paid the correct amount of tax.
5.3. Special Case: Philadelphia Wage Tax
If you are subject to the Philadelphia wage tax, you may be able to use it as a credit against your liability to your resident jurisdiction. However, the credit may not exceed your resident jurisdiction tax rate.
Court Decision on Philadelphia Wage Tax Credits
Per a court decision passed down on January 7, 2013, individuals who have City of Philadelphia non-resident wage tax withheld may apply the taxes paid as a credit against wages earned outside the city as well. This decision returns the crediting provisions to how they were applied for tax year 2011 and prior.
6. Employer Responsibilities: Withholding and Remittance
Employers in Pennsylvania have specific responsibilities when it comes to withholding and remitting local earned income taxes.
Whose Earned Income Tax will be withheld by their employer? As of 1st quarter of 2012 all employers who maintain a physical location in the Commonwealth of Pennsylvania are required to identify the higher of the 2 tax rates an employee may be subject to, either the employee’s resident tax rate or the work location’s non-resident tax rate and withhold at that rate and remit the taxes due at least quarterly. Let’s delve into the details.
6.1. Identifying the Correct Tax Rate
Employers must identify the higher of the two tax rates an employee may be subject to:
- The employee’s resident tax rate.
- The work location’s non-resident tax rate.
6.2. Withholding and Remitting Taxes
Employers are required to withhold taxes at the higher of the two rates and remit the taxes due at least quarterly.
6.3. Employer Location Matters
These requirements apply to all employers who maintain a physical location in the Commonwealth of Pennsylvania.
7. Filing Requirements: Who Must File a Final Return?
Knowing whether you need to file a final return is a crucial part of complying with Pennsylvania’s local earned income tax laws.
Must all taxpayers file a final return? Yes. If you live in a jurisdiction with an Earned Income tax in place and had wages for the year in question, a local earned income return must be filed annually by April 15, for the preceding calendar year. Let’s explore this requirement in more detail.
7.1. Annual Filing Requirement
If you live in a jurisdiction with an earned income tax in place and had wages for the year in question, you must file a local earned income return annually.
7.2. Filing Deadline
The filing deadline is typically April 15 of each year (unless the 15th falls on a weekend, in which case the due date becomes the next business day).
7.3. What to Do if You Had No Earned Income
If you had no earned income, you must still file a final return, stating the reason why.
8. Joint Filing: Can You File Together?
Can you and your spouse file your local earned income tax return jointly?
Can I file jointly? Yes, through the due date. However, returns filed after the due date must be filed individually. Let’s break it down.
8.1. Filing Jointly Before the Due Date
You can file jointly with your spouse, but only through the due date (typically April 15).
8.2. Filing Separately After the Due Date
If you file after the due date, you must file individually.
9. Part-Year Residency: How to Handle a Move
What happens if you move into or out of a Pennsylvania municipality during the year? This is where part-year residency rules come into play.
What should I do if I lived in a jurisdiction/municipality for only part of the year? You are required to file a return for any period of time you were/are a resident to a municipality for which Berkheimer is the tax administrator. You are required to file for the period of time you lived in that municipality and prorate your income, expenses, withholding, etc. Let’s explore this topic further.
9.1. Filing Requirement for Part-Year Residents
You are required to file a return for any period of time you were a resident of a municipality for which Berkheimer is the tax administrator.
9.2. Prorating Income, Expenses, and Withholding
You must prorate your income, expenses, and withholding based on the length of time you lived in that municipality.
9.3. Formula for Prorating
Here’s a formula you can use for prorating:
Total year’s income / 12 months or 365 days X length of time living in Jurisdiction = Income taxable to that jurisdiction (same formula can be used for withheld and expenses)
9.4. Updating Your Address
You must complete the change of address section on your final return.
10. Updating Your Information with the Tax Administrator
Keeping your information up-to-date with the tax administrator is essential for accurate tax processing and communication.
How can I update my information (name, address) with your company? Click here to complete our online Individual File Maintenance form. Let’s delve into why this is important.
10.1. The Importance of Accurate Information
Providing accurate information ensures that you receive important tax notices, refunds, and other communications in a timely manner.
10.2. Using the Online File Maintenance Form
You can update your information quickly and easily by completing the online Individual File Maintenance form.
11. Documentation: What to Submit with Your Return
Submitting the right documentation with your final return is crucial for supporting the information you’ve reported.
What documentation do I need to submit with the final return? You should submit documentation which sufficiently supports the amount reported on each line of your return, including but not limited to, W-2s, State business reporting schedules, expense schedules, etc. Let’s explore the specifics.
11.1. Supporting Your Return
You should submit documentation that supports the amounts reported on each line of your return. This may include:
- W-2 forms.
- State business reporting schedules.
- Expense schedules.
11.2. Non-Resident State Income Taxes
If you are claiming a credit for non-resident state income taxes paid to a non-reciprocating state, you must include a copy of that state’s return with your final return.
11.3. Photocopies Are Acceptable
Photocopies of your supporting documentation are acceptable.
12. Finding Your Earned Income on Your W-2 Form
Your W-2 form is a key document for filing your local earned income tax return.
Where is my Earned Income reported on my W2? Your local earned income should be reported in the box labeled “State Wages, tips, Etc.” If this box is not completed, then you should refer to the box labeled “Medicare Wages.” Let’s clarify this further.
12.1. Locating Your Earned Income
Your local earned income should be reported in the box labeled “State Wages, tips, Etc.”
12.2. What If the State Box Is Not Completed?
If the “State Wages, tips, Etc.” box is not completed, you should refer to the box labeled “Medicare Wages.”
12.3. Out of State Employment
If you are employed out of state, you should refer to the box labeled “Medicare Wages.”
12.4. Explaining Substantial Differences
If the amount reported in the “State” box is substantially different than the amount reported as Medicare Wages, you should submit an explanation for this difference.
12.5. Locating Your Local Income Tax Withheld
Your local income tax withheld should be reported in the box labeled “Local Income Tax.”
13. E-Filing: Filing Your Return Electronically
Filing your local earned income tax return electronically can save you time and hassle.
Can I file my return electronically? You can file your Local Earned Income Tax Return online. To learn more, click here. Let’s explore the benefits of e-filing.
13.1. Online Filing Options
You can file your Local Earned Income Tax Return online.
13.2. Using the BerkApp
If you have a simple return or images of your tax return, you can use our BerkApp.
14. Mailing Your Return: Where to Send It
Knowing where to send your local earned income tax return is essential for ensuring that it is processed correctly.
What address do I send my return to? The address you should use depends on whether you are expecting a refund/credit, making a payment, or neither. Let’s break it down.
14.1. Refund/Credit
If you or your spouse are expecting a refund/credit, please mail to:
Refund/Credit HAB-EIT PO Box 25160 Lehigh Valley, PA 18002
*Refunds are issued within 75 days of the date that a tax return was due to be filed or within 75 days of the date your tax return is actually filed, whichever is later.
14.2. Payment
If you are making a payment, please mail to:
Payment HAB-EIT PO Box 25158 Lehigh Valley, PA 18002
14.3. Refund/Credit and Payment
If you or your spouse are expecting a refund/credit and making a payment, please use the refund/credit address.
14.4. No Payment/No Refund
If you are not expecting a refund or making a payment, please mail to:
No Payment/No Refund HAB-EIT PO Box 25159 Lehigh Valley, PA 18002
15. Payee: Who Should You Make Your Check Payable To?
When making a payment for your local earned income tax, it’s important to know who to make your check payable to.
Who should I make my check payable to? For the local earned income tax, all checks should be made payable to HAB-EIT. Let’s keep it simple.
15.1. Proper Payee
For the local earned income tax, all checks should be made payable to HAB-EIT.
16. Locating Your Jurisdiction: Finding Your Municipality
If you’re not sure what jurisdiction you reside in, there are resources available to help you find out.
How can I find out what jurisdiction my address is located in? If you need to locate what jurisdiction you are residing in, please click here. Let’s explore how to do this.
16.1. Online Resources
If you need to locate what jurisdiction you are residing in, you can click the link provided to access online resources.
17. Tax Rates and PSD Codes: Finding the Right Information
Knowing the tax rate and PSD code for your jurisdiction is essential for filing your local earned income tax return accurately.
Where can I locate the tax rate or PSD Code for a specific jurisdiction? If you need information on tax rates and PSD Codes, please click here. Let’s clarify how to find this information.
17.1. Online Resources
If you need information on tax rates and PSD Codes, you can click the link provided to access online resources.
18. Filing an Extension: What You Need to Know
If you need more time to file your local earned income tax return, you may be able to file an extension.
Can I file an extension for the Local Earned Income Tax? If you file a Federal or State Application for Extension, send us a copy along with estimated payment or file your extension online by April 15th. Let’s break down the process.
18.1. Federal or State Extension
If you file a Federal or State Application for Extension, send us a copy along with estimated payment.
18.2. Online Extension
You can also file your extension online by April 15th.
19. Amending Your Return: Correcting Errors
If you discover an error on your local earned income tax return after you’ve filed it, you may need to amend your return.
How can I file an amended return? You can download a blank final return by clicking here. Write AMENDED RETURN on the top of the return and fill out the form with the corrected information. Let’s clarify the steps.
19.1. Downloading a Blank Return
You can download a blank final return by clicking the link provided.
19.2. Marking the Return as Amended
Write AMENDED RETURN on the top of the return.
19.3. Completing the Form
Fill out the form with the corrected information.
19.4. Submitting Documentation
Submit all supporting documentation with your amended return to the appropriate address.
20. Distressed Tax: Understanding Act 205 or Act 47
Some taxing jurisdictions in Pennsylvania have a distressed tax (Act 205 or Act 47) that can affect your local earned income tax liability.
My employer is located in an area with a distressed tax. Am I entitled to a refund? If the additional earned income tax imposed exceeds the earned income tax rate due your resident municipality/school district under Act 511, that portion of the tax is not refundable; rather, it remains within the township or borough which has enacted the distressed tax. Let’s explore this in more detail.
20.1. What is a Distressed Tax?
Some taxing jurisdictions have a distressed tax (Act 205 or Act 47) that is imposed on both residents of that jurisdiction and non-residents employed within that jurisdiction.
20.2. Refund Eligibility
If the additional earned income tax imposed exceeds the earned income tax rate due your resident municipality/school district under Act 511, that portion of the tax is not refundable.
20.3. Where the Tax Remains
The non-refundable portion of the tax remains within the township or borough that has enacted the distressed tax.
21. Need More Help? Contact Customer Care
If you have additional questions that are not addressed in this guide, you can contact customer care for assistance.
If you have additional/specific questions that are not addressed above, please click on the link to send an inquiry to our Customer Care Department.
FAQ: What is Considered Earned Income for PA Local Tax?
Here are some frequently asked questions to clarify what is considered earned income for PA local tax:
- What is the Earned Income Tax in Pennsylvania? The Earned Income Tax (EIT) is a local tax levied on the wages, salaries, tips, and net profits of individuals who live or work in Pennsylvania.
- What types of income are subject to the Pennsylvania Local Earned Income Tax? Wages, salaries, tips, commissions, and net profits from self-employment are generally subject to the PA Local EIT.
- Are there any deductions I can take to reduce my Earned Income Tax liability? Yes, certain employee business expenses, as determined under Article III of the Tax Reform Code of 1971, are allowable deductions.
- Are unemployment benefits considered earned income for PA local tax purposes? No, unemployment compensation payments made by any governmental agency are specifically exempt.
- Is military active duty pay subject to PA Local Earned Income Tax? No, active duty military pay is exempt from taxation regardless of where it was earned.
- What if I take an early distribution from my retirement account? If you take an early distribution (prior to age 59 ½ or via allowed exception) from a retirement account, the portion that is taxable to the Commonwealth of Pennsylvania is also taxable for local purposes.
- What is Active Duty Pay? Compensation received by active duty members of the military is called active duty pay.
- I work in Philadelphia, do I have to pay both the Philadelphia Wage Tax and the local EIT? No, if employed in Philadelphia, you may use the Philadelphia Wage Tax as a credit against your liability to your resident jurisdiction, but the credit may not exceed your resident jurisdiction tax rate.
- What if I lived in a jurisdiction/municipality for only part of the year? You are required to file a return for any period of time you were a resident of a municipality for which Berkheimer is the tax administrator.
- How is earned income reported on my W-2? Your local earned income should be reported in the box labeled “State Wages, tips, Etc.” If this box is not completed, then you should refer to the box labeled “Medicare Wages.”
Navigating the complexities of Pennsylvania’s local earned income tax can be challenging. By understanding what constitutes earned income, what is exempt, and how to comply with filing requirements, you can ensure that you meet your tax obligations accurately and efficiently. For more information and resources, visit income-partners.net to explore partnership opportunities and maximize your income potential. Contact us at Address: 1 University Station, Austin, TX 78712, United States. Phone: +1 (512) 471-3434 or visit our Website: income-partners.net. Let income-partners.net help you find the perfect partnership to boost your financial success and navigate the world of income opportunities.
