Among the many issues created by the pandemic, local income tax withholding in Pennsylvania caused administrative headaches for Pennsylvania employers over the last several months (as explained in our previous blog). In today’s blog, we will discuss the Philadelphia Wage Tax Refund process for 2020.
Who is Subject to Wage Tax?
Employees who are non-residents of Philadelphia and work for employers in the city are subject to the Philadelphia Wage Tax at a rate of 3.5019%. If your employer REQUIRES you to work outside of the city on any day, you are not subject to the wage tax for that day. For example, if your job requires you to visit various customers outside of the city, you would not have to pay the wage tax on any day you are outside of Philadelphia visiting those customers. If you work outside of the city for your own convenience, however, you are still subject to the wage tax.
Philadelphia residents are subject to the wage tax at a rate of 3.8712% no matter where they work.
During the pandemic, the City of Philadelphia did not change its position regarding the wage tax: any non-resident employee who is REQUIRED to work remotely, outside of the city, because of the pandemic is not subject to the wage tax during that period.
Who is Eligible for a Refund?
Any non-resident employee with Philadelphia Wage Tax withheld during a period where they were required to work somewhere outside of the city is eligible for a refund. Thus, if your employer required remote working during the pandemic, you are not subject to the wage tax during that period.
There are other non-COVID-related reasons as well that would make you eligible for a refund:
- You received non-taxable stock options on which wage tax was paid.
- You have unreimbursed employee business expenses that can reduce your Philadelphia wages. Deductible expenses are those that are not reimbursed by your employer and are ordinary, necessary, and reasonable. Important in 2020 and 2021 - home office expenses may be allowable unreimbursed employee business expenses – read more here.
What is the Process for Requesting a Wage Tax Refund?
Prior to 2020, to request a refund of wage taxes paid, employees had to file and submit a Wage Tax Refund Petition to the city. This form could not be filed electronically. Because the City of Philadelphia is expecting an extreme increase in the number of refund petitions for 2020, they have attempted to make the process easier.
For 2020 only, employers can now submit a bulk refund petition request on behalf of their employees. The city has provided an Excel template on its website that can be filled out by employers and uploaded electronically. All refunds will still be mailed directly to employees.
If an employer is not submitting the petition on behalf of its employees, the employees can still file the petition themselves. There is a simplified form (the COVID-EZ Refund Petition) to be filled out for 2020 by non-resident employees requesting refund petitions due to COVID only. While this form can still be filed via paper, the city is now accepting the forms electronically. This should expedite the receipt of refunds. You will need to include a copy of your Form W-2 showing the taxes paid to Philadelphia and a signed letter from your employer indicating the dates you were required to work outside of the city in 2020.
Note that if you are requesting a refund for any reason other than COVID-related time outside of the city, you will need to file the normal Wage Tax Refund Petition, which cannot be filed electronically.
All forms and instructions can be found on the City’s website.
What Should You Do as an Employee?
Below are the steps we suggest you take if you are a non-resident of Philadelphia and you were required to work remotely, outside of the city, during 2020 because of the pandemic:
- Find out during what period your employer withheld Philadelphia Wage Tax in 2020. You can determine this from looking at your W-2 and applying a bit of algebra, reviewing your paystubs or asking your payroll/HR department.
- Ask your employer if they are submitting the Wage Tax Refund Petition on your behalf. If they are, no further action is required.
- If your employer is not submitting a petition for you, request a signed letter, on company letterhead, indicating the dates you were required to work remotely in 2020 due to the pandemic. Your refund request will be denied if this letter is not provided.
- Either file the refund petition online, fill out and file the paper form, or give all the necessary information to your tax accountant. Make sure all required attachments (letter from your employer and copy of all applicable W2s) are included with your filing.
The pandemic has disrupted most aspects of our lives. While many employers quickly adapted to the remote workforce, we expect that most employers did not adjust their employees’ withholding on the first day teleworking was required. Thus, many non-residents of Philadelphia will be eligible for refunds of the 2020 wage taxes paid. Talk to your tax advisor if you need help determining your wage tax obligations or potential refunds due for 2020.