RULES AND REGULATIONS
DEPARTMENT OF REVENUE
[61 PA. CODE CHS. 113 AND 121]
Employer Withholding Provisions
[33 Pa.B. 6423]
The Department of Revenue (Department), under the authority contained in section 354 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7354), by this order amends §§ 113.2, 113.3, 113.3a, 113.3b, 113.4, 113.16 and 121.16 to read as set forth in Annex A.
Purpose of this Final-Form Rulemaking
This final-form rulemaking is intended to serve the following purposes:
1. Section 113.3(c) and (d) (relating to computing withholding of Pennsylvania Personal Income Tax) is being amended to add the provisions of the act of May 7, 1997 (P. L. 85, No. 7) (Act 7) relating to cafeteria plans and other employee compensation arrangements. See section 301(d) of the TRC (72 P. S. § 7301(d)).
2. The amendments establish new employer identification number requirements to facilitate the Department's Keystone Integrated Tax System.
3. The amendments establish new employer registration requirements to facilitate the common employer registration form of the Department and the Department of Labor and Industry.
4. The amendments change W-2 filing requirements in order to facilitate the Department's new Infoimage System and make more use of electronic and magnetic media.
5. The Federal employee reporting and withholding requirements for tip income are being adopted so that businesses will not have to deal with conflicting requirements at the Federal and State level.
6. The addition of § 113.16 (relating to enforceable trust fund) will enhance the Department's enforcement powers.
Explanation of the Final-Form Rulemaking
Section 113.2 (relating to compensation subject to withholding) is amended by adding a new paragraph (3) relating to tips. Employers are required to deduct and withhold tax on tips of which the employer has the control, receipt, custody or payment or that are reported by the employee and only to the extent that the employer can collect the tax by deducting it from the employee's compensation exclusive of tips.
Section 113.3 (relating to computing withholding of Pennsylvania Personal Income Tax) is amended by adding a new subsection (c) that addresses special situations pertaining to the deduction or payment of amounts by an employer for or on behalf of an employee. A new subsection (d) provides that amounts specified in a cafeteria plan as being available to the employee for purposes of selecting or purchasing benefits under a plan or as additional cash remuneration received in lieu of coverage are excludible from tax and withholding if certain enumerated conditions are met.
Section 113.3a (relating to employer identification number) is added to explain the various rules relating to Federal and State employer identification numbers.
Section 113.3b (relating to registration) details when an employer shall register with the Department.
Section 113.4 (relating to time and place for filing reconciliation and withholding statements) has been amended by deleting unnecessary language relating to the completion of W-2's for tax year 1971. Subsection (b) is updated to provide for the filing of quarterly withholding returns. Subsection (c) is amended by providing that reconciliation statements with accompanying withholding statements for each employee can be forwarded to the Department by means of first class mail or electronic or magnetic media. The subsection is further amended to provide that if an employer is required to file 250 or more withholding statements, the reconciliation statement with accompanying withholding statements shall be forwarded via electronic or magnetic media as specified in the instructions of the Department available on its website or at its Harrisburg or district offices.
Section 113.16 is added to provide guidance regarding deducted and withheld tax.
Finally, § 121.16 (relating to Form W-2) is deleted in its entirety, consistent with the changes regarding W-2 filing requirements previously referenced.
Affected parties are employers, employees and tax professionals.
Comment and Response Summary
Notice of proposed rulemaking was published at 31 Pa.B. 4956 (September 1, 2001). This proposal is being adopted with changes to read as set forth in Annex A.
No comments were received from the public during the public comment period. No comments were received from the House and Senate Finance Committees. The Department did receive comments from the Independent Regulatory Review Commission (IRRC).
Amendments to the proposed rulemaking in response to comments are as follows:
1. In the proposal, the Department added § 113.3(d) and (e) to explain statutory trust fund provisions. In its comments, IRRC suggested that the trust fund provisions should be moved to a separate and distinct section. The Department agrees with IRRC's suggestion and creates a new § 113.16. The new language clarifies who may be held liable for withheld tax and how the amount of the liability is determined.
2. With regard to § 113.3(f)(3), since the nontaxable payments referenced are delineated in existing § 101.6 (relating to compensation), IRRC recommended that the Department insert a reference to § 101.6. The Department agrees and amends paragraph (3) accordingly.
3. In § 113.3b, IRRC suggested that the Department modify the section to state how employers can access a registration form. The Department agrees with IRRC's suggestion and amends the section accordingly.
4. Section 113.4(c) states that when employers file withholding statements by means of electronic or magnetic media, the date shall be forwarded as specified in the instructions of the Department. IRRC suggested that the Department explain what the instructions are and where they can be found. The Department agrees with IRRC's suggestion and amends subsection (c) accordingly.
Comment that did not result in an amendment to the regulation is as follows:
IRRC raised a concern with regard to proposed § 113.3(f) which provides that certain amounts specified in a cafeteria plan document are excluded from tax and withholding if the enumerated conditions are met. IRRC indicated that paragraph (3) should appear as a separate subsection because it addresses payments that are outside of a qualifying cafeteria plan but are still nontaxable for Pennsylvania Personal Income Tax purposes. It is the Department's position that paragraph (3) should be read in conjunction with subsection (f)(1) and (2) and not as a separate, stand alone statement; therefore, no revision was made to the paragraph.
This final-form rulemaking establishes specific requirements for the reporting and withholding of tips income. Instead of being remitted with the taxpayers' estimated or annual payments, tips income will be withheld by employers. As a result, tax collection on tips income will be accelerated to the extent that employers comply with the withholding requirements. This accelerated tax collection should result in tax savings and improved tax compliance of tips income earners.
Using an effective date of January 2004 (for calculation purposes only), and using an average interest rate at which the Commonwealth invests funds, the Department has estimated a tax revenue gain of about $8.2 million for Fiscal Year 2003-04 and about $0.5 million additional revenue in interest thereafter. This estimate may be overstated because actual interest earnings will depend on cash balances in the Treasury's funds and some taxpayers may qualify for 100% tax forgiveness. The estimate could be understated because the estimate assumes that these persons are reporting all of the tip income currently. To the extent that they are not, there could be an additional revenue increase.
This final-form rulemaking will not require additional paperwork for the public or the Commonwealth. This final-form rulemaking will reduce paperwork requirements in that form W-2 will no longer be required to be filed with each individual return.
This final-form rulemaking will become effective upon final publication in the Pennsylvania Bulletin. This final-form rulemaking is scheduled for review within 5 years of publication. No sunset date has been assigned.
The contact person for an explanation of the amendments is Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on August 17, 2001, the Department submitted a copy of the notice of proposed rulemaking, published at 31 Pa.B. 4956, to IRRC and the Chairpersons of the House Committee on Finance and the Senate Committee on Finance for review and comment. In compliance with section 5(c) of the Regulatory Review Act (71 P. S. § 745.5(c)), the Department also provided IRRC and the Committees with copies of all comments received, as well as other documentation.
In preparing this final-form rulemaking, the Department has considered the comments received from IRRC, the Committees and the public.
This final-form rulemaking was deemed approved by the Committees on November 5, 2003, and was approved by IRRC on November 6, 2003, in accordance with section 5.1(e) of the Regulatory Review Act (71 P. S. § 745.5a(e)).
The Department finds that:
(1) Public notice of intention to amend the regulations has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The amendments are necessary and appropriate for the administration and enforcement of the authorizing statute.
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 61 Pa. Code Chapters 113 and 121, are amended by amending §§ 113.2, 113.3, 113.4; by adding §§ 113.3a, 113.3b and 113.16; and by deleting § 121.16 to read as set forth in Annex A.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
GREGORY C. FAJT,
(Editor's Note: For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 33 Pa.B. 5791 (November 22, 2003).)
Fiscal Note: Fiscal Note 15-418 remains valid for the final adoption of the subject regulations.
TITLE 61. REVENUE
PART I. DEPARTMENT OF REVENUE
Subpart B. GENERAL FUND REVENUES
ARTICLE V. PERSONAL INCOME TAX
CHAPTER 113. WITHHOLDING OF TAX
§ 113.2. Compensation subject to withholding.
All compensation shall be subject to withholding of tax by an employer. Regulations for residents and nonresidents shall be as follows:
(1) Residents. The following procedure shall be utilized by employers withholding Commonwealth Income Tax from a resident:
(i) If a Commonwealth resident renders service in this Commonwealth, his employer shall withhold Commonwealth tax from his compensation.
(ii) If the employer is subject to the jurisdiction of this Commonwealth and a Commonwealth resident is rendering services as his employee in another state, the following procedure shall be followed:
(A) If the other state does not have an income tax, he shall withhold on the compensation he pays to the employee.
(B) If the other state does have an income tax and the employer is withholding the tax, the employer is not be required to withhold Commonwealth tax.
(C) If the employer is not withholding income tax for the state in which the services are rendered, he shall withhold Commonwealth tax.
(iii) If a Commonwealth resident is rendering services partly within and partly outside this Commonwealth, the following procedure shall be followed:
(A) If the other state does not have an income tax, he shall withhold on the entire compensation he pays to the employee.
(B) If the other state does have an income tax and the employer is withholding the tax, the following employer shall also withhold the following Commonwealth income tax on compensation for services rendered within this Commonwealth:
(I) The amount of compensation attributable to services within this Commonwealth shall be that proportion of the total compensation which the total number of working days employed within this Commonwealth bears to the total number of working days employed both within and outside this Commonwealth, exclusive of nonworking days. Nonworking days are normally considered to be Saturdays, Sundays, holidays, and days of absence because of illness or personal injury, vacation, or leave with or without pay.
(II) With respect to earnings of a traveling salesman or other employee whose compensation depends directly on the volume of business transacted by him, the amount attributable to services within this Commonwealth shall be that proportion of the compensation received which the volume of business transacted by him within this Commonwealth bears to the total volume of business transacted by him both within and outside this Commonwealth.
(C) If the employer is not withholding income tax for the state in which the services are rendered, he shall withhold Commonwealth tax on the entire compensation.
(2) Nonresident. The following procedure shall be utilized by employers withholding Commonwealth income tax from a nonresident:
(i) The tax shall be deducted and withheld on compensation paid to nonresident employees for services performed in this Commonwealth. Accordingly, if a nonresident employee performs all of his services in this Commonwealth, the tax shall be deducted and withheld from all compensation paid him.
(ii) If a nonresident employee performs services partly within and partly outside this Commonwealth, only compensation for services within this Commonwealth shall be subject to withholding.
(A) The amount of compensation attributable to services within this Commonwealth shall be that proportion of the total compensation which the total number of working days employed within this Commonwealth bears to the total number of working days employed both within and outside this Commonwealth, exclusive of nonworking days. Nonworking days are normally considered to be Saturdays, Sundays, holidays, and days of absence because of illness or personal injury, vacation, or leave with or without pay.
(B) With respect to earnings of a traveling salesman or other employee whose compensation depends directly on the volume of business transacted by him, the amount attributable to services within this Commonwealth shall be that proportion of the compensation received which the volume of business transacted by him within this Commonwealth bears to the total volume of business transacted by him both within and outside this Commonwealth.
(iii) The portion of compensation allocable to the Commonwealth may be determined by the employer on the basis of the preceding year's experience, or on the basis of an estimate for the current year made by the employee or his employer. In either case, the employer shall make any necessary adjustment during the year to assure that the proper amount is withheld for the current year.
(iv) An employer shall withhold on all compensation paid to a nonresident who works partly within and partly outside this Commonwealth unless the employer maintains adequate current records to determine accurately the amount of compensation from Commonwealth sources.
(i) Every employee who, in the course of his employment, receives in any calendar month cash tips which are wages as defined in section 3401(a) of the IRC (26 U.S.C.A. § 3401(a)) shall report those tips in one or more written statements furnished to his employer on or before the 10th day following that month.
(ii) Employers are required to deduct and withhold tax only on tips of which the employer has the control, receipt, custody or payment or tips that are reported by the employee and only to the extent that the employer can collect the tax by deducting it from the employee's compensation exclusive of tips.
§ 113.3. Computing withholding of Pennsylvania Personal Income Tax.
(a) The Pennsylvania Personal Income Tax to be withheld shall be at the rate prescribed in Article III of the TRC (72 P. S. §§ 7301--7361). For example, the rate applicable to the first pay period beginning on or after:
January 1, 1983 is 2.45
July 1, 1984 is 2.35
January 1, 1986 is 2.20
September 1, 1986 is 2.10
(1) Regular compensation. Computation of withholding tax on regular compensation shall be made in accordance with the following:
(i) For a payroll period an employer shall compute the tax to be withheld from the compensation of an employee by multiplying the compensation by the rate prescribed in Article III of the TRC.
(ii) The term ''payroll period'' means a period for which a payment of compensation is ordinarily made to an employee by his employer and may be a daily, weekly, biweekly, semimonthly, monthly, quarterly, semiannual or annual period.
(2) Supplemental or other compensation. If supplemental, such as commissions, overtime pay, vacation pay, bonuses, and so forth, or other compensation is received by an employee, an employer shall determine the tax to be withheld by adding the supplemental or other compensation for the current payroll period and multiplying the amount by the rate prescribed in Article III of the TRC.
(b) In addition to the tax required to be withheld, an employer and employee may agree that an additional amount be withheld from the employee's compensation. The agreement shall be in writing, and the amount deducted and withheld under the agreement between the employer and employee shall be considered as tax required to be deducted and withheld, and statutes and regulations applicable to the tax are applicable with respect to an amount deducted and withheld under the agreement.
(c) Except as provided in subsection (d):
(1) Any amount lawfully deducted by an employer from the remuneration of an employee shall be deemed to be a part of the employee's remuneration and to have been paid to the employee as compensation at the time the deduction is made.
(2) Any amount paid by an employer on behalf of an employee without deduction from the remuneration of, or other reimbursement from, the employee on account of any liability or obligation of, or payment required from, an employee shall be deemed to be paid to the employee as compensation at the time the payment is made.
(3) Any payment made to an employee, third party or fund under a cash or deferred arrangement under which an employee may unilaterally elect to have the employer make payments to the third party or fund for the benefit of the employee or to the employee directly in cash shall be deemed to be paid to the employee as compensation at the time the payment is made.
(4) Any payment made to an employee, third party or fund under an arrangement under which an employee may unilaterally choose between two or more benefits consisting either of cash and coverage under a plan or coverage under two or more plans shall be deemed to be paid to the employee as compensation at the time the payment is made.
(d) Amounts specified in a cafeteria plan document as being available to the employee for the purpose of selecting or purchasing benefits under a plan or as additional cash remuneration received in lieu of coverage under a plan are excludible from tax and withholding if the following apply:
(1) They were not actually or constructively received, after taking section 125 of the IRC (26 U.S.C.A. § 125) into account.
(2) The benefits selected or purchased are nontaxable under the IRC when offered under a cafeteria plan described in section 125 of the IRC.
(3) The payments made for the plan would be nontaxable under § 101.6 (relating to compensation) if made by the employer outside a cafeteria plan described in section 125 of the IRC.
§ 113.3a. Employer identification number.
An employer shall use both the Federal and Pennsylvania employer identification numbers to report all Pennsylvania withholding. Employers who have not yet received a Federal employer identification number will be assigned a temporary Pennsylvania number until the Federal employer identification number is obtained, at which time the Department shall be notified. If an employer has multiple divisions using the same Pennsylvania employer identification number but remitting and reconciling withholding tax separately, the employer shall request a separate Pennsylvania number for each division.
§ 113.3b. Registration.
Every employer having an office or transacting business within this Commonwealth and making payment of wages for the first time to one or more nonresident individuals performing services on behalf of the employer within this Commonwealth or to one or more resident individuals shall, within 10 business days of the payment, register with the Department by completing and filing Form PA-100 Pennsylvania Combined Registration Form available on its website or at its Harrisburg or district offices.
§ 113.4. Time and place for filing reconciliation and withholding statements.
(a) An employer shall submit a wage and tax withholding statement to each of his employees on or before January 31 following the year of payment of compensation, or within 30 days from the date of the last payment of compensation if employment or the business is terminated.
(1) An employer shall use the combined Federal-State Wage and Tip Withholding Statement (Form W-2) issued by the Internal Revenue Service or one that conforms thereto with the word ''Commonwealth'' printed, stamped or typed thereon. The statement shall show the name of employer, address and identification number of the employer; the name, address and Social Security number of the employee; the total compensation paid during the taxable year; and the total amount of Pennsylvania tax withheld during the taxable year.
(2) The wage and tax withholding statements required in this chapter shall be in addition to a requirement of the Federal or a local government.
(b) A completed Reconciliation Statement (Return Form PA-W3), reconciling Personal Income Tax withheld with related quarterly withholding returns and deposit and employee withholding statements shall be submitted by the following:
(1) A going business for tax withheld in the prior year, annually, by January 31.
(2) A terminated business within 30 days after the end of the month in which business or payment of compensation ceased.
(c) Reconciliation Statements (Form PA-W3), with accompanying withholding statements (Form W-2) for each employee shall be forwarded by means of first class mail with sufficient postage or electronic or magnetic media as specified in instructions of the Department to the Department. If an employer is required to file 250 or more withholding statements, the reconciliation statement, with accompanying withholding statements shall be forwarded by means of electronic or magnetic media as specified in the instructions of the Department available on its website or at its Harrisburg or district offices.
§ 113.16. Enforceable trust fund.
(a) For purposes of assessment and collection of deducted tax and withheld tax that is not paid over to the Department, all taxes deducted and withheld from employees under this article or under color of this article shall constitute a trust fund for the Commonwealth and shall be enforceable against the employer, his representative, any person knowingly receiving a disbursement of any part of the fund, any person receiving a disbursement of any part of the fund without giving fair and valuable consideration therefore or any other person who is required to collect, account for and pay over the tax. The taxes will not be enforceable against a person receiving a disbursement from an employer if, before the negligent failure to truthfully account for and pay it over to the Commonwealth is discovered, the money is expended in payment of a genuine, uncontested and enforceable obligation, judgment, claim, lien or other liability of the person existing at the time the money was obtained or otherwise superior to the rights of the Commonwealth.
(b) Tax deducted from the State wages of an employee shall be considered to have been withheld at the time of payment of the State wages against which the deduction was charged.
(c) If an employer fails or refuses to pay over any withheld tax or to deposit it in a separate account in trust for and payable to the Department or otherwise identify and segregate it from other funds, it shall be deemed that:
(1) Withheld tax would be on deposit in the general operating account of the employer at the time of payment of the State wages from which deduction was made.
(2) The employer would disburse withheld tax last.
(3) Once withheld tax is disbursed, subsequent deposits would not replenish it.
(4) The lowest intermediate balance of cash on deposit in the general operating account is withheld tax that constitutes a trust fund for the Commonwealth that is enforceable against the employer or any person receiving any part of the fund.
(5) Any excess of the tax deducted over the lowest intermediate balance is withheld tax that has been received by the employer and disbursed.
CHAPTER 121. FINAL RETURNS
§ 121.16. (Reserved).
[Pa.B. Doc. No. 03-2453. Filed for public inspection December 26, 2003, 9:00 a.m.]
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