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CPA Now
Dec 14, 2020

DCED (Finally) Issues Needed Local Earned Income Tax Guidance

Cheri Freeh, CPABy Cheri H. Freeh, CPA, CGMA


When the world came to a halt last March, businesses across Pennsylvania took precautions to meet the emergency mandates and ensure the safety of their employees by directing them to work remotely from their residences. While the emergency measures are seemingly straightforward, the unintended impacts on state and local income taxes are significant.

In early November, the Pennsylvania Department of Revenue issued temporary guidance regarding telework during the COVID-19 pandemic. The guidance clarified that if an employee is working from home temporarily, the department would not consider this as a change to the sourcing of the employee’s compensation. Until recently, no similar guidance had been issued in Pennsylvania at the local tax level, with the exception of the City of Philadelphia. This left a lack of local guidance for the vast majority of Pennsylvania businesses and residents.

Rules and Regulations rubber stamps on paperworkMembers of the PICPA have been expressing growing concern about this lack of guidance to taxpayers, tax collectors, and tax practitioners on the withholding and remittance of local earned income taxes during a temporary period of employment. Under Act 511 of 1965, The Local Tax Enabling Act, as amended by Act 32 of 2008, employers are required to withhold the local earned income tax at the higher of the employee’s resident tax rate where they live or the nonresident tax rate based on where they work or their designated work location. Act 18 of 2018, which the PICPA spearheaded, amended Act 511 to provide further clarification for employees who have temporary or transient job locations. Under Act 18, employers are to withhold the greater of the employee’s resident tax rate or the employee’s nonresident tax rate, based on the job location, for any employee working for 90 or more consecutive days at a job location.

But when you throw a pandemic into the mix with the resulting remote working conditions, now a situation exists where many employees have worked for 90 or more consecutive days at their homes. Applying these temporary job assignment requirements has the potential to create an administrative nightmare for employers. Without any further guidance, every employer would have to obtain an updated local residency certificate from each employee or risk the potential liabilities for failing to do so. After obtaining the updated information they would need to update their payroll systems to accommodate all the different locations where their employees are now working. The end result of all this time-consuming work is that, in the majority of cases, there is no change to the amount of tax being withheld from an employee’s pay.

Most local tax jurisdictions have a nonresident earned income tax rate of 1% or less, and a large number of them have resident tax rates that are higher. This is because there is a cap of 1% on the nonresident tax rate, with only a handful of local jurisdictions qualifying for a nonresident tax rate in excess of 1%. However, there are several permissible exceptions to the 1% maximum rate for residents, and some jurisdictions that impose the earned income tax have taken advantage of those exceptions and increased resident tax rates above 1%. The result is that almost all employees will have their resident tax rate withheld because the law dictates the higher of the two will be withheld.

There are cases where the nonresident rate at a job location is higher than an employee’s home resident rate, particularly when an employee resides in a jurisdiction that has no earned income tax. But these represent a small percentage of all employees. This situation may also impact self-employed persons.

PICPA’s State Taxation Committee, through its Local Tax Task Force, has been working to obtain definitive guidance on the COVID-19 pandemic situation. Act 18 of 2018 specifically states that this guidance may only come from the Pennsylvania Department of Community and Economic Development (DCED). Act 511 as amended by Act 18 of 2018 states in Section 505(a.1)(7) that no policies or procedures may be adopted by a tax collection committee other than those promulgated by DCED, and Section 508 (g)(2) states that DCED shall ensure that all rules and regulations are those promulgated by DCED. The PICPA went straight to the source and reached out to DCED, but received no response. On Nov. 18, the PICPA wrote Gov. Tom Wolf seeking guidance for local tax purposes from DCED. In response, the DCED finally issued the following:

“The Department of Community and Economic Development finds it reasonable for local governments to apply a rule for local taxes that is analogous to the rule for state taxes discussed above – i.e., to conclude that telework does not change the prepandemic status quo with regard to the collection of the local services tax and the nonresident earned income tax from employees who are working from home on a temporary basis during this unprecedented emergency.”

The guidance issued by the Department of Revenue is effective until the earlier of June 30, 2021, or 90 days after the governor’s Proclamation of Disaster Emergency dated March 6, 2020, is lifted. We can assume from DCED’s communication that its guidance will follow the same effective dates. As the pandemic continues, we can only hope that the period of coverage for this guidance will be sufficient. It is also possible that the state could modify the ending date.

The PICPA Local Tax Task Force has been working diligently to help improve the local tax landscape for many years. The members of the task force would like to express sincere gratitude to State Rep. George Dunbar for his continued dedication and hard work in addressing local tax issues.


Cheri H. Freeh, CPA, CGMA, is president and CEO of Hutchinson Gillahan & Freeh PC in Quakertown. She can be reached at cfreeh@hgfpc.com.

The author would like to thank fellow PICPA members David A. Caplan, Matthew D. Melinson, and James J. Newhard for their assistance in the development of this piece.


For more on Pennsylvania’s local tax issues, the task force will present the webinar Life, Liberty, and the Pursuit of Pennsylvania Local Taxes on Jan. 21, 2021. Also, sign up for more weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form



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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.
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