Pennsylvania Employers: New Withholding Requirements Under Act 32 Become Effective January 1, 2012

On January 1, 2012, Pennsylvania Act 32 of 2008 becomes effective across the entire Commonwealth. This law consolidates the collection of local income taxes and imposes new withholding requirements on Pennsylvania employers.

What is Act 32?

Effective January 1, 2012, Pennsylvania employers must begin withholding the greater of employees’ home resident local earned income taxes or the employees’ worksite nonresident local earned income taxes.  Employers must then report and remit those taxes to the appropriate local taxing authorities on a periodic basis.

Employees may oppose the new withholding rules because some employees could see their take-home pay shrink under the new law due to a higher tax rate. This problem may arise if the employee’s worksite nonresident local earned income tax rate is higher than the employee’s home resident local earned income tax rate. For example, if a worksite location has a 1.5% nonresident local earned income tax rate and an employee resides in a locality that has a 1.0% resident local earned income tax rate, under Act 32, the employer must withhold the higher amount, 1.5%.

It is important to note that this law applies to all Pennsylvania employers and employees. Consequently, even if employees do not want their local taxes withheld from their paychecks, Act 32 still requires the employer to withhold local earned income taxes at the appropriate rate. If an employer fails to withhold, report, and remit local earned income taxes for all Pennsylvania employees, it could be liable for the entire amount of the applicable tax if the taxing authority cannot recover the tax from the individual employees.

What Action is Required Now?

The new law also requires that employers obtain from their employees certificate of residency forms. The certificate of residency form ensures employers are withholding the proper amount of local earned income tax for each employee. These certificate of residency forms require employees to provide their political subdivision code for both their resident and worksite locations. This information allows employers to ensure they are withholding the local earned income taxes at the correct rate and remitting the taxes to the proper authorities.  It is also important to note that the completion of certificate of residency forms is a requirement imposed on the employer, and employers may be penalized if they do not have completed certificate of residency forms for each Pennsylvania employee. Therefore, it is imperative that employers obtain a completed certificate of residency form for each Pennsylvania employee prior to January 1, 2012.

Leech Tishman’s Employment Practice Group has experience handling matters with the state and local tax and employment agencies and is willing to advise you and answer any questions you may have regarding the new requirements under Act 32.

Please feel free to contact the Employment Group with any questions regarding the new Act 32 withholding requirements or any other employment law issue.

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