The closing of offices amid the coronavirus pandemic may bring a bit of relief to some of the thousands of workers who live outside of Philadelphia but commute to jobs in the city: A break from the city’s highest-in-the-nation wage tax.
Philadelphia-area residents who are now working from their dining-room tables or home offices are likely eligible to stop paying the tax or apply for refunds later. As long as companies are requiring employees to work from home, they are exempt from the 3.4481% nonresident tax. (People who live in the city, no matter where they work, must always pay the 3.8712% resident wage tax.)
How do I know if I am eligible to stop paying the wage tax?
If you live outside the city and have been working from home because your company closed its Philadelphia offices under orders from Mayor Jim Kenney and Gov. Tom Wolf, you do not have to keep paying the city wage tax.
Employers can stop withholding the tax from the paychecks of non-Philadelphia residents who are now required to work remotely, city spokesperson Mike Dunn said.
Workers who are still required to report to work at essential jobs in the city must continue paying the tax as usual.
What if my employer does not stop withdrawing the tax from my paycheck?
If an employer does not change the tax withholding on your paycheck, or begins doing so after you’ve already been working from home for a few weeks, you can apply for a refund from the city for days worked outside the city.
Refund requests can be submitted to the Philadelphia Department of Revenue after the end of a tax year, or in 2021 for days worked outside the city during the current crisis.
Refund applications require an employer’s signature verifying time worked outside of the city.
How much money will this save me?
Workers will essentially receive a 3.4481% increase in take-home pay during the time they are working from home. People who live in municipalities with their own earned income taxes may have to begin paying those levies, which are usually 1% or less, which would still result in a net savings compared with the higher city rate.
The total savings depends how long offices remain closed. For a worker who lives in a town without any earned income tax, has a taxable income of $60,000 per year, and is required to work from home for eight weeks, for example, the savings would total about $318.
Will this hurt the city financially?
Relief from the wage tax may be good news to suburban residents, but it will add to the already damaging impact of the pandemic on the city’s finances.
The wage tax, which raised $1.7 billion in revenue for the city in the last fiscal year, accounts for more than one-third of the city’s annual general fund revenue.
About 40% of wage tax revenue is paid by nonresidents, according to the city’s financial data. And more than 240,000 residents commute to Philadelphia from surrounding counties in Pennsylvania, New Jersey, and Delaware, according to an analysis of U.S. Census data completed last year by the Pew Charitable Trusts.
“My sense is that that would be a fairly sizable exemption and have fairly sizable impacts on the nonresident wage tax,” said Robert Inman, a finance professor at the University of Pennsylvania.
But it’s difficult to predict exactly how much it will cost the city, Inman said. Some nonresidents are continuing to commute to Philadelphia for jobs at hospitals, grocery stores, and other essential businesses. And for those working from home, not all employers will stop withholding the tax and not all workers will take the time to apply for refunds next year.
The Pennsylvania Intergovernmental Cooperation Authority predicted that the city will lose between $310 million and $400 million in revenue between April and June; executive director Harvey Rice said he was not sure if that estimate accounted for the loss of nonresident wage taxes.
Does this apply if I keep working from home after the pandemic ends?
After experiencing remote work for a few months, companies may change their work-from-home policies, adding flexibility.
But that doesn’t necessarily mean you can stop paying the tax forever. There’s a key word to the exemption permitted by the pandemic: required. The exemption from the wage tax only applies if a Philadelphia-based employee is required to work outside the city.
Workers have always been eligible for wage tax refunds for days on which they are required to travel to other cities for business, for example. And Eagles players who live outside the city don’t pay the wage tax when they’re at away games.
So if your company decides remote work was so effective during the coronavirus pandemic that it is closing its offices forever, non-Philadelphia employees can stop paying the tax. But if your company simply decides to offer an option of working from home one or two days a week, you have to keep paying the tax on the entirety of your income.