Savanna Hoffman
The City Wage Tax in Philadelphia is a flat-rate tax on salaries, wages, commissions, and other compensation. All employed Philadelphia residents must pay the Wage Tax, regardless of where they work, and non-residents who work in Philadelphia are also subject to it. The Wage Tax rate for Philadelphia residents is 3.75%, while the rate for non-residents is 3.44%. However, some forms of income are exempt from the Wage Tax, including scholarships received as part of a degree program. With the recent changes in Philadelphia's tax structure, it is unclear whether students are exempt from the City Wage Tax.
| Characteristics | Values |
|---|---|
| What is the Wage Tax? | A tax on salaries, wages, commissions, and other compensation. |
| Who does it apply to? | All employed Philadelphia residents, regardless of where they work. Non-residents who work in Philadelphia must also pay the Wage Tax. |
| Are students exempt? | Scholarships received as part of a degree program are exempt from the Wage Tax. However, it is unclear if students are exempt if they are employed. |
| What are the rates? | For Philadelphia residents: 3.75%. For non-residents: 3.44%. |
| How often is it filed? | The Wage Tax must be filed quarterly. |
| Where is it filed? | The Philadelphia Tax Center. |
| Are there penalties for late payments? | Yes, interest and penalties will be added to the amount owed. |
| Are there any changes to the tax structure? | Yes, starting in Tax Year 2025, there will be significant changes to Philadelphia's tax structure, including the Wage Tax. |
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What You'll Learn
Who pays the Philadelphia City Wage Tax?
The Philadelphia City Wage Tax is a tax on salaries, wages, commissions, and other compensation. The tax applies to payments received from an employer in return for work or services. All employed Philadelphia residents owe the Wage Tax, regardless of where they work. Non-residents who work in Philadelphia must also pay the Wage Tax, but only on the portion of their compensation that is earned within the city, based on working days. Employers are required to withhold the Wage Tax from all employees who meet these criteria.
Some forms of income are exempt from the Wage Tax. These include scholarships received as part of a degree program, for which the recipient does not provide any services. Additionally, if a non-resident's employer withholds Wage Tax for time spent working outside of Philadelphia, that portion of the Wage Tax can be refunded.
Starting in Tax Year 2025, the Wage Tax rates for both residents and non-residents will decrease over the next five years. The Wage Tax must be filed quarterly and paid according to a schedule based on the amount of money withheld from employees' paychecks. Employers must file and pay the Wage Tax on the Philadelphia Tax Center, and payroll service companies must submit W-2s to the City of Philadelphia.
In the case of students, while there is no explicit mention of whether they are exempt from the Philadelphia City Wage Tax, it can be inferred that if a student is employed and receiving a salary, wages, or other compensation as defined by the Wage Tax, they would be subject to the tax. This would apply regardless of whether they are a resident or non-resident of Philadelphia, as long as they are working within the city. However, if a student's only source of income is a scholarship received as part of a degree program, this would be exempt from the Wage Tax.
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Tax rates
The City of Philadelphia levies a Wage Tax on salaries, wages, commissions, and other compensation. All employed Philadelphia residents are subject to the Wage Tax, regardless of where they work. Non-residents who work in Philadelphia are also required to pay the tax. The Wage Tax must be filed quarterly, and the payment schedule corresponds with the amount of money withheld from employees' paychecks.
The Wage Tax rates for Philadelphia residents and non-residents differ. As of July 1, 2023, the Wage Tax rate for Philadelphia residents is 3.75%, down from 3.8398%. The rate for non-residents remains unchanged at 3.44%. The Wage Tax is a flat rate, meaning that each person pays the same percentage, regardless of their income level.
Some forms of income are exempt from the Wage Tax. This includes scholarships received as part of a degree program, for which the recipient does not provide any services. Additionally, individuals with PA tax forgiveness may be eligible for an income-based Wage Tax refund. They will pay the Wage Tax at a reduced rate of 1.5% and can claim a refund for any amount above this discounted rate.
It is important to note that the City of Philadelphia has announced significant changes to its tax structure starting in the 2025 tax year (due in April 2026). Over the next five years, the resident and non-resident Wage Tax rates are expected to decrease. However, specific details about the new tax rates have not been disclosed.
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Tax exemptions
The City of Philadelphia has a Wage Tax that applies to all employed Philadelphia residents, regardless of where they work, and to non-residents who work in Philadelphia. The Wage Tax is typically withheld from workers' paychecks and is considered a tax on salaries, wages, commissions, and other compensation.
Some forms of income are exempt from the Wage Tax. These include scholarships received as part of a degree program for which the recipient does not provide a service.
For non-residents, the City of Philadelphia uses a "requirement of employment" standard. This means that non-residents are exempt from the Wage Tax when their employer requires them to perform a job outside of Philadelphia. This exemption also applies to residents who are required to work outside the city by their employer. However, a non-resident who works from home for their convenience is not exempt from the Wage Tax, even with their employer's authorization.
During the COVID-19 pandemic, non-residents who were working remotely were exempt from the Wage Tax. However, when businesses fully reopened for in-person work, non-resident workers again became subject to the Wage Tax, even if they were only required to come into the office a few days a week.
It's important to note that tax rates, exemptions, and policies in Philadelphia are subject to change. The city has announced significant changes to the tax structure starting in 2025 (due in April 2026), including changes to the Wage Tax.
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Filing and payment
The Wage Tax is a flat-rate tax levied on salaries, wages, commissions, and other compensation paid to individuals who work or reside in Philadelphia. It does not apply to unearned income such as interest, rents, dividends, or capital gains. The Wage Tax must be filed and paid quarterly, and the filing frequency is determined by the amount of Wage Tax withheld. Employers are responsible for withholding the Wage Tax from their employees' paychecks and remitting it to the City of Philadelphia. Both employers and employees must use the Philadelphia Tax Center for quarterly returns and payments.
For employers with multiple worksite locations, there is an option to file and remit all local Earned Income Tax (EIT) withholdings to a single local tax collector. However, this option requires electronic filing and monthly submissions rather than quarterly. Additionally, it does not apply to the Local Services Tax (LST), which may still require separate remittances to multiple LST collectors.
The Wage Tax rates differ for residents and non-residents of Philadelphia. As of July 1, 2023, the Wage Tax rate for Philadelphia residents is 3.75%, while the rate for non-residents remains unchanged at 3.44%. Non-Pennsylvania residents who work in Philadelphia but do not file a Pennsylvania income tax return must include a signed copy of their state income tax return to be eligible for income-based rates.
It's important to note that some forms of income are exempt from the Wage Tax. For example, a scholarship received as part of a degree program is exempt if the student does not provide any services in return. If an employer withholds more Wage Tax than is due, employees can file a claim to receive a refund for the excess amount. This may occur if a non-resident employee works outside of Philadelphia for a period and their employer withheld the Wage Tax for that time.
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Changes to the tax structure
The City of Philadelphia has implemented significant changes to its tax structure, with the new policies coming into effect from 2025 (due in April 2026). The changes include modifications to tax rates, exemptions, and policies.
One of the key changes is the reduction in the Wage Tax rate for Philadelphia residents, which was lowered to 3.75% from 3.8398% on July 1, 2023. This change was announced via an email from the City of Philadelphia, stating a decrease for workers residing in the city. The Wage Tax is levied on salaries, wages, commissions, and other forms of compensation. It is important to note that the Wage Tax rate for non-residents has remained unchanged at 3.44%.
The City of Philadelphia's Wage Tax applies to all employed residents, regardless of their workplace location. Additionally, non-residents who work within the city boundaries are also subject to this tax. Employers are responsible for withholding the appropriate Wage Tax rate from their employees' paychecks and remitting it to the Philadelphia Tax Center on a quarterly basis.
Another aspect of the tax structure changes in Philadelphia is the School Income Tax (SIT). This tax applies to Philadelphia residents who receive certain types of unearned income, such as dividends, royalties, specific rental income, lottery winnings, and certain types of interest. However, there is a lack of transparency regarding the SIT rate, collection rate, and the amount raised, which has been a subject of inquiry by local journalists.
Furthermore, Philadelphia's tax structure also includes the Local Earned Income Tax (EIT) withholdings, which allow businesses with multiple worksite locations across the state to file and remit taxes to a single local tax collector. However, this option does not apply to the Local Services Tax (LST), and separate remittances may still be required for multiple LST collectors.
The City of Philadelphia has also provided resources to support businesses during this transition, including a newsletter and webinars, to help them navigate the changes to the tax structure. These changes are expected to unfold over the next five years, with a gradual decrease in the resident and non-resident Wage Tax rates.
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Frequently asked questions
It depends on whether the student is a Philadelphia resident and the nature of their income. Scholarships received as part of a degree program are exempt from the Wage Tax.
The Wage Tax is a flat-rate tax on salaries, wages, commissions, and other compensation paid to a person who works or lives in Philadelphia.
The Wage Tax must be filed and paid on the Philadelphia Tax Center.
Yes, non-residents who work in Philadelphia and receive a salary, wages, commissions, and other compensation must pay the Wage Tax.
