The Philadelphia Wage Tax

Headnote

Planning Considerations for Nonresident Employees

The Philadelphia wage tax applies to employee compensation earned within the city of Philadelphia, Pennsylvania.

Through proper recordkeeping and use of the allocation and apportionment procedures applicable under Philadelphia tax law to determine the portion of a nonresident's compensation earned outside the city, nonresident employees of Philadelphia employers may be able to reduce this tax liability. In addition, maximizing the compensation paid in the form of stock options will greatly reduce an employee's Philadelphia wage tax liability, since gains from stock options are fully exempt from the Philadelphia wage tax.

Wage Tax Structure and Application

Under Philadelphia tax law, the city's wage tax is imposed on compensation paid by an employer to any person who is employed by or renders services to the employer.1 The tax is imposed on compensation (1) earned by Philadelphia residents regardless of where they perform services as an employee, and (2) earned by nonresidents for work done or services rendered in Philadelphia.2 For purposes of the Philadelphia wage tax, compensation includes salaries, wages, commissions, bonuses, incentive payments, vacation pay, holiday pay, and termination or severance payments.3 For 2007, the Philadelphia wage tax rate was 4.26% for residents and 3.7557% for nonresidents. As of January 2008 the resident tax rate is 4.219% and the nonresident tax rate is 3.7242%.

Operative terms: employee and employee. Under the Philadelphia wage tax law, an "employee" is any person who renders services to another for a financial consideration or its equivalent, under an express or implied contract, and who is under the control and direction of the latter, including temporary, provisional, casual, or parttime employment.4 An "employer" is an individual, partnership, association, corporation (including a nonprofit corporation), governmental body or agency, or any other entity that employs one or more persons on a salary, wage, commission, or other compensation basis.5

Resident vs. nonresident. For wage tax purposes, a "resident" is an individual domiciled in the city of Philadelphia, and a "nonresident" is an individual domiciled outside the city.6 A "domicile" is the place where a person lives and has his or her permanent home and principal establishment, and to which the person has the intention of returning following any absence. Every person has only one domicile.7

Nonresidents' services...