Yikes, A Big Tax Bill!!!

Q. My husband works for a large company, and I receive disability and do not work.  We just had our taxes done this week and got quite a shock!  We had a federal income tax refund of over $4000, but owed state tax of $1000 and local taxes of $600.  We are in PA.  How can we adjust our withholding so that this does not happen again next year?

A.  When payroll people hear the Pennsylvania, they run screaming from the room.  The local tax debacle there is the stuff legends are made of.  In most states, when someone has too little withholding, an employee can simply get a copy of the state’s W-4 equivalent, and reduce the number of allowances claimed.  This has the effect of increasing the amount of income subject to tax and thus increasing the tax withheld.  Unfortunately, in PA, there is no W-4 equivalent.  PA is calculated as a flat percentage of taxable income, 3.07% to be exact.  I’m not sure where to point you on this one.  Did you have non-wage income like dividends or capital gains that were not taxed?  Do you have a small business on the side where there were no estimated payments made?  Perhaps the payroll system at your husband’s employer has a way to allow for additional withholding beyond the standard percentage.

For the local tax, there is again no W-4 equivalent in most cases.  However, there is very likely an obvious cause for this under withholding.  In PA, employers are required to withhold where the employee works.  If he works in a different jurisdiction than the one he lives in, then the withholding rate will be lower.  He will have the non-resident rate applied to his wages.  In most cases for PA, the resident rate is 1% (could be higher) and the non-resident rate is half of that.  Therefore, he could have only half as much tax taken from his check as was required.  If an employer opts to withhold at the higher resident rate, it is called courtesy withholding.  Not all employers wish to do this because of the extra record keeping requirements.  Check with your employer to see what is possible with regards to increasing the local tax withholding as well.

Pennslvania Withholding Form

Q. I need a Pennsylvania version of the W-4. Where are they?

A. Pennsylvania has no equivalent of the Form W-4. This creates huge problems with regards to the employee reporting to the employer what municipality they reside in. Often the town of reference in the address is not the same as the municipality for withholding purposes.

That is beside the point however. W-4 forms are used by payroll departments for setting the marital status and number of allowances for an employee. Because these items don’t exist in Pennsylvania withholding there is no need for the form. PA is currently calculated as 3.07% of gross wages. You can’t claim extra allowances to reduce withholding, you are just stuck at that percentage.

Therefore, when you provide new hire forms to your employer, all you need to provide is the federal W-4 and the I-9 plus any company specific documents requested. Now, if we could just figure out a way to get the state to simplify the number of local taxing jurisdictions, payroll in PA would not be so difficult.