Philadelphia Wage Tax Refunds – Reboot for 2021

Posted on Fri, Mar 04, 2022 ©2021 Drucker & Scaccetti

PaymentBy: Ashley Menders

 

So much has changed since the pandemic, including many tax laws, but one thing that hasn’t changed is the Philadelphia City Wage Tax withholding requirements for non-residents. City Wage Tax is imposed on all the wages for Philadelphia residents (whether they work inside or outside of the city) and on non-residents when they work in Philadelphia. Since July 1, 2021, the Philadelphia resident rate is 3.8398% and the non-resident rate is 3.4481%.

 

While Philadelphia residents are eligible for refunds of City Wage Tax if they paid tax to other local jurisdictions (i.e., Wilmington, Delaware), we are going to focus on refunds for non-residents, as the pandemic has changed how and where employees work, and many employees are telecommuting and working from home outside of the city (see our blog Telecommuting - Payroll Issues for Pennsylvania Businesses and Employees).

 

As we mentioned earlier, non-residents are subject to City Wage Tax when they work in the City, EXCEPT Philadelphia’s rules are not simply based on where the employee physically works, but rather a “requirement of employment” standard, which means if an employer requires a non-resident to work outside the city, then he or she is not subject to City Wage Tax.  Per the Philadelphia Department of Revenue, “A non-resident employee who works from home for his or her convenience is not exempt from the Wage Tax – even with his or her employer’s authorization.” This is known as the Convenience of the Employer Rule.

 

As you can imagine, with many employees working from home during the pandemic, this issue was very confusing as it related to City Wage Tax for non-residents, and Philadelphia issued guidance in March of 2020 (revised in November of 2020) that stated: “Non-resident employees who work for Philadelphia-based employers are not subject to Philadelphia Wage Tax during the time they are required to work outside of Philadelphia.” The guidance also stated: “Non-resident employees who had Wage Tax withheld during the time they were required to perform their duties from home in 2020, may file for a refund with a Wage Tax refund petition in 2021.” See our blog Philadelphia Wage Tax Refunds – What’s New for 2020? Plenty!

 

During 2021, employers started to open their Philadelphia offices, which meant that their non-resident employees “could” be subject to the wage tax. The reason that we say “could” is because if the employer has restrictions on the number of employees allowed in the office or if the employer has a policy requiring the non-residents to work from home, then those non-resident employees would not be subject to City Wage Tax. On the other hand, if Philadelphia offices are “Open for Business” with no restrictions, then non-residents are subject to City Wage Tax, even when they are working from home. In May of 2021, the City released an FAQ on the Wage Tax to address the various scenarios. No matter what your situation is, keeping track of days worked in and outside Philadelphia is a good habit to start so you have the information readily available if ever needed.

 

For those who had City Wage Tax withheld when it was not required, Wage Tax refunds for 2021 can now be filed. The Department of Revenue is once again allowing employers to submit bulk refund requests for their employees in 2022, however, the special form for bulk refunds is still in process. If an employer is not submitting a bulk refund, employees can now file their own refund request through the new online Philadelphia Tax Center - click on “Request Wage Tax refund” to get started. To make this process easier for non-residents, an account is not required to submit a Wage Tax refund.

 

Philadelphia City Wage Tax quickly became another aspect of life that was changed by the pandemic. As we look forward to opening offices, non-resident employees will be subject to City Wage Tax once again. If you believe that City Wage Tax was withheld when it wasn’t required, you should discuss filing a Wage Tax refund with your tax advisor for refunds due for 2021.

Topics: Philadelphia Wage Tax, City Wage tax, remote workforce

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