On January 26, 2020, the City of Philadelphia (the “City”) released guidance announcing that employers would be able to file mass tax refund requests on behalf of their non-Philadelphia resident employees for the City’s requisite Wage Tax withholding. The new guidance is only applicable to the 2020 tax year and is the City’s way of making tax refunds easier to request for the taxpayer and easier for the City to process during these difficult times of COVID-19.
The City Wage Tax is a tax on salaries, wages, commissions, and other compensation or payments that a person receives from an employer in return for work or services. All Philadelphia residents are subject to the City Wage Tax, regardless of where they work. In addition, non-residents who work in the City of Philadelphia are also subject to the Wage Tax. For the 2020 tax year, Philadelphia residents are subject to the Wage Tax at a rate of 3.8712%. Non-residents are subject to a rate of 3.5019%, an increase from the 3.4481% rate applied to the 2019 tax year.
Employers are required to withhold the Wage Tax, as well as file and pay the withholding on a schedule based on the total amount withheld from employees’ paychecks. In cases where the employee was subjected to excessive withholding, the individual employee may request a Wage Tax Refund with the City. Prior to 2020, individual taxpayers could file a petition for a refund on the City’s Wage Tax withheld by their employers.
New Guidance for Tax Year 2020
With the COVID-19 pandemic causing major disruptions to many Philadelphia employers and workers, employers and their employees have had to adapt to new working conditions. For many companies, this meant mandating that their employees work from home in order to abide by the safety precautions set in place within the City of Philadelphia and the Commonwealth of Pennsylvania.
For nonresident employees who were mandated to work from home by their employers, this meant that many individuals were not performing their work within the City, and as such, are generally entitled to a refund on the Wage Tax collected while they were performing work from outside the City.
With so many nonresident employees ordered to work from home during the pandemic, the Philadelphia Department of Revenue expects hundreds more 2020 Wage Tax refund requests this tax season. Therefore, the Philadelphia Department of Revenue created a new form employers can submit on behalf of all their non-resident employees. The new form can be downloaded from the City of Philadelphia website, where employers must provide the complete tax information of all non-resident employees requesting a refund for Wage Tax withheld. Also included on the website is an instructional form explaining how employers can calculate refund amounts for their non-resident employees.
⇒The City of Philadelphia’s new guidance should cause a sigh of relief for many individual taxpayers. Although individual taxpayers (i.e., employees) have the option to petition for a refund themselves, the new procedures are intended to help facilitate and speed up the processing of refunds by the City. Individual taxpayers are encouraged to inquire with their employers if they plan on filing a group refund request on their behalf. If not, individual taxpayers may still file their own request online (which is the preferred filing method) or by using the paper form provided on the City of Philadelphia’s website. Note, however, that individuals filing their own refund petition must provide copies of their W-2s and a letter from the employer (on company letterhead) identifying the dates the individual was required to work from home. In addition, the petition must also be signed by the employer certifying that the information provided in the petition is true and correct.
⇒While there does not appear to be a specific filing deadline, any claims for refunds must be made within three years from the date the tax was paid or due, whichever is later.
⇒With the new guidance for the 2020 tax year, employers have a unique opportunity to help their non-resident employees maximize their refunds during these difficult times. Employers should let their employees know that they will be filing on their behalf in order to assist them in getting the largest tax refund possible.
⇒Employers filing a group refund request on behalf of their employees, are encouraged to file the petition electronically through the City’s online portal, which may be accessed from the following LINK. The City also provides additional resources in preparing the petition, as well as calculating the actual amount of the refund, which may be found HERE.
⇒Lastly, as the guidance provides, this new form is only available for the 2020 tax year. Employees should not rely or expect the guidance to continue for the 2021 tax year and should be prepared to file for a refund for the 2021 tax year on their own, unless the City of Philadelphia extends this process.
If you have any questions regarding the City of Philadelphia’s 2020 Wage Refund procedures, please contact a member of Friedman’s State and Local Tax Team: