EIT reform taking effect in state

STATE

Fewer tax collectors should streamline payroll for employers, improve collections

A 3-year-old reform law designed to eliminate ineffi ciencies in Pennsylvania's local earned income tax collection system fi nally will take eff ect next year.

Signed by former Gov. Ed Rendell, Act 32 requires all commonwealth employers to remit EIT withholdings for all resident and nonresident employees.

To comply with the mandate, businesses are required to maintain a certifi cate of residency for each employee, which determines the rate of withholding.

Th e residency step, which many companies have been working on this year in preparation for the change, has been off set by a reduction in the number of EIT collectors from 560 to 69 tax collection districts. Th ose districts have been set up by county to include all local taxing jurisdictions, with EIT handled by a single collection officer.

Philadelphia is exempt, and Allegheny County has four tax collection districts.

Employers also are obligated to withhold at the higher rate between resident and nonresident.

For example, a Harrisburg resident who works in Reading would be tagged with a nonresident EIT rate of 1.3 percent by their Berks County employer. Harrisburg's EIT is 1 percent, while Reading has a rate of 1.3 percent.

The business owner would remit money withheld at that higher rate to the tax collection officer. Since the home community is entitled to be paid first, 1 percent would be distributed to Harrisburg by the collection district officer. The remaining 0.3 percent of the EIT would stay in Reading.

In Swatara Township, the EIT rate is 1 percent for a nonresident. If a worker there lived in Dauphin Borough where the EIT is 2 percent, Dauphin would get the entire amount.

Whether a company has one office and 10 employees or operations and employees throughout Pennsylvania, the law streamlines the payroll process going forward because all withholdings can be sent to a single tax officer who then distributes to the appropriate taxing bodies.

"In the long run, think of the hours of manpower employers will save," said Lisa Myers, a partner at East Pennsboro Township-based Boyer & Ritter Certified Public Accountants and Consultants.

Under the current system, 560 taxing authorities are collecting nearly $1.9 billion in EIT for more than 2,900 taxing jurisdictions - more local governments than all other states combined, said Myers.

Act 32 should lower the cost of the collection system and bolster the amount of EIT collected statewide, she said, due to increased oversight and annual audits of tax collectors.

A 2007 study done by the Pennsylvania Economy League found that the system left as much as $237 million uncollected every year because of payroll deductions not being submitted by employers and misappropriation of funds.

"There are a lot more controls on our process," said Tom Butts, director of community services with Westmoreland County-based Keystone Collections Group, the tax collector for Dauphin and Lebanon counties, as well as nine other tax collection districts.

Over the last year, there has been a push by database software and payroll companies to make sure necessary system adjustments were in place to adapt to the Act 32 requirements, he said. The final step has been training employers on the new system and ensuring they have the right political subdivision codes, or PSDs, for all employee EIT withholding, he said.

The PSD is a six-digit code formulated to designate each of the 69 tax collection districts, along with the school districts and municipalities therein.

"This new form will ensure accurate, up-to-date information is captured," Amy Richards, a spokeswoman for the Dauphin County commissioners, said about the new residency certification process.

The county employs more than 1,700 full- and part-time employees.

"Going forward, the payroll tax process will be more streamlined as the number of payroll tax collectors to which we send is reduced," said John Sandy, a spokesman for Lancaster County-based The High Cos., which employs 2,100 people at 48 locations throughout the eastern and Midwestern U.S., including 1,700 in Pennsylvania.

Businesses with offices in multiple Pennsylvania counties can continue to file quarterly returns for each of their local offices, according to the law. If they choose to file all withholdings with the tax collection officer in their home county, they must file monthly and do so electronically.

Failure to comply can lead to fines of up to $25,000 and two years in jail.

[Sidebar]

EIT: Pennsylvania law streamlines payroll process going forward

About the pending changes

Under Act 32, municipalities are part of the tax collection district in which their school district is based, regardless of whether they are in another county.

The Dauphin County district includes Reed Township, which is in Dauphin County but is part of the Susquenita School District in Perry County; and Porter Township and Tower City, which are part of the Williams Valley School District in Dauphin and Schuylkill counties.

For more information about the pending changes, businesses can view a 14-minute tutorial video created by Tom Butts, director of community services with Keystone Collections Group.

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[Author Affiliation]

By Jason sCott

jasons@journalpub.com