Wednesday, May 4, 2011

Act 32 for Maryland Residents Working in Pennsylvania

Employers having an office, factory, workshop, branch, warehouse, or other place of business within a Tax Collection District (TCD) and that employs one or more persons, other than domestic servants, for salary, wage, commission or other compensation are required to withhold the local earned income tax (EIT) and to register with the appropriate TCD. An employer having a place of business in Pennsylvania is required to withhold the applicable EIT, even when employees reside outside of Pennsylvania, such as in Maryland.

Reciprocity Agreements on the State and Local Levels for Pennsylvania and Maryland

Pennsylvania and Maryland have a reciprocal agreement. Maryland residents working in Pennsylvania may complete Form REV-419, Employee's Nonwithholding Application Certificate, to have only their Maryland state income taxes withheld from wages earned in Pennsylvania. Reciprocal agreements are generally on the state level, although some local taxing jurisdictions may have their own version of these reciprocity agreements. These rules are not statewide and are unique to each taxing authority. Generally, localities do not follow the state level reciprocity agreements and Pennsylvania local income tax withholding is required from Maryland residents working in Pennsylvania localities. However, localities within York and Adams Counties do not require Pennsylvania local earned income taxes withheld from Maryland residents working within their jurisdictions.

How Does Act 32 Apply to the Withholding Rules for Maryland Residents Working in York and Adams Counties?

Act 32 does not change the existing rules in York and Adams counties. Withholding is still not required from Maryland residents on wages earned in York and Adams counties.

Act 32 Nonresident Withholding for York and Adams Counties vs. All Other Counties

Except for York and Adams counties, withholding is required on wages of Maryland residents working in all other Pennsylvania localities that impose a nonresident EIT.

Lancaster Tax Collection Bureau's (LTCB) publication, Employer EIT Act 32 Instructions, gives an example of what employers must withhold for a Maryland resident working in Lancaster County. An employer with a work location in Quarryville Borough must withhold the Quarryville earned income tax at the nonresident EIT rate.

*Tax rates shown in the example are for illustration only and may not be the actual tax rate for the named municipality. Employers must refer to the DCED Local Tax Register for actual rates.

Using the above example, but with the work location in Franklin Township (York County), the employer is not required to withhold the nonresident EIT.

Example 2: Nonresident Rate Withholding NOT Required

Employers may or may not have to withhold the applicable nonresident EIT tax from Maryland residents working in Pennsylvania. This depends on whether the work location is 1) within the counties of York and Adams or 2) within the rest of the counties in the state.