The Employee Earnings Tax is a tax on salaries, wages, commissions, and other compensation paid to an individual who works or lives in Philadelphia. Also known as the Wage Tax, it is typically withheld and remitted by employers with nexus in Philadelphia, and employees working for employers who withhold and remit 100% of the tax due do not need to file an annual return. There are situations, however, where an individual will need to file the Annual Reconciliation of Employee Earnings Tax Return:
- A Philadelphia resident with taxable income who works for an out-of-state employer that doesn’t withhold the Wage Tax from their paycheck. (Out-of-state employers aren’t required to withhold it.)
- A nonresident who works in Philadelphia and doesn’t have the Wage Tax withheld from their paycheck.
Gross compensation includes wages, commissions, tips, bonuses, severance pay, sick pay, vacation pay, incentive payments, director or officer fees, graduate fellowships (if services are required of the student), non-cash compensation (at fair market value), fringe benefits (see IRC 89 for guidelines), and military reserve pay. It does not include active duty military pay.
Partners in a partnership that pays the NPT do not need to pay the Employee Earnings Tax. Likewise, self-employed individuals do not pay the tax since they are paying BIRT and/or NPT.
The Annual Reconciliation of Employee Earnings Tax return consists of two pages. Page 2 is used to allocate income if needed as well as claim unreimbursed business expenses, if allowed. The last two lines of page 2 flow to page 1 where the tax due is calculated.
To access the Employee Earnings Tax Return in Keystone Tax Solutions Pro, from the Individual Pennsylvania Tax Return Menu select:
- Miscellaneous Forms
- PA City Tax Return
- Philadelphia Employee Earnings Tax Return
Additional Information
- Employer Information – Enter here the employer’s name, location, and EIN.
- Residency Information – Indicate whether the form is being filed by a resident, nonresident, or part-year resident with dates of residency.
- Amended Return – If this is an amended return, answer YES.
- Eligible for Income-Based Taxation – Answer YES if the Pennsylvania return includes Schedule SP,
Gross Compensation Received – The gross compensation amount is pulled from the Form W-2(s) entered in the federal return if the locality begins with “PHI”.
Allocation of Gross Compensation – The allocation report on page 2 of the return has several purposes:
- Nonresident employees who received compensation for services performed both inside and outside of Philadelphia use this report to allocate their wages;
- Unreimbursed employee expenses can be deducted to the extent they are supported by federal Form 2106;
- Statutory employees (as indicated on the Form W-2) can deduct Schedule C expenses.
The allocation report has two sections for allocating salary (based on number of days) and commission (based on sales volume). Each section is divided into two columns for the first and second halves of the year, with each half having a slightly different tax rate. An employee might have both commission and salary wages that will need to be entered in both sections.
- Compensation for Salary Employees –
- Gross Compensation for Salaried Employees – Enter the gross compensation for each half of the year.
- Nontaxable Stock Options Included in Salary – Enter nontaxable compensation reflected on the employee’s Form W-2 for each half of the year.
- Number of Days/Hours Employed – Enter the number of days or hours actually employed during each half of the year both within and without Philadelphia. This number includes overtime and also includes days or hours on sickness or disability leave if regular pay was also received.
- Number of Non-Workdays/Hours – Enter the number of days or hours not working in each half of the year. This includes time when worker’s compensation or similar compensation is received that is less than regular pay.
- Number of Actual Days/Hours Worked Outside Philadelphia – Enter the number of days or hours employed outside Philadelphia.
- Expenses from 2106 – Enter the unreimbursed employee expenses as supported by the federal return.
- Compensation for Commission Employees –
- Gross Compensation for Commissioned Employees – Enter the gross compensation for each half of the year.
- Nontaxable Stock Options Included in Commissions – Enter nontaxable compensation reflected on the employee’s Form W-2 for each half of the year.
- Total Sales – Enter the number of days or hours actually employed during each half of the year both within and without Philadelphia. This number includes overtime and also includes days or hours on sickness or disability leave if regular pay was also received.
- Sales Earned Outside of Philadelphia – Enter the number of days or hours employed outside Philadelphia.
- Expenses from 2106 – Enter the unreimbursed employee expenses as supported by the federal return.
Philadelphia Wage Tax Withheld on W-2 – The wage tax withheld is pulled from the Form W-2(s) entered in the federal return if the locality begins with “PHI”.
If the total tax due is less than that withheld by the employer on Forms W-2, the Earnings Tax Return does not need to be filed. Rather, the employee should file the Employee Wage Tax Refund Petition. This form is not available in Keystone Tax Solutions Pro but can be downloaded from the City of Philadelphia here.
Tax You Previously Paid for 2019 – Enter the total of wage tax paid by the employee separately from employer withholdings on their Form W-2.
Amount Applied to 2020 Earnings Tax – Enter the amount of the overage the employee wishes to be applied to their return for next year, otherwise it will be refunded.
Note: This is a guide on creating the Philadelphia Employee Earnings Tax Return in Keystone Tax Solutions Pro. It is not intended as tax advice. You are encouraged to review the information from the City of Philadelphia, as it is both complete and authoritative.
Additional Information:
City of Philadelphia: Employee Earnings Tax general information