LA Payroll - Taxes: PA State Income Tax, Non Resident

Almost all states that impose a personal income tax require that the tax be paid on all income earned in the state, including income earned by non-residents. Non-residents generally have to file a non-resident income tax return with the state, and if the state where they live also imposes a personal income tax, then the individual will also have to file an annual tax return for all income earned, regardless of where it was earned. Residents can usually take a credit on the return for their state of residence for taxes paid to other states.

However, in order to relieve taxpayers of this double burden, many states have entered into state tax reciprocal agreements. If two states have a reciprocal agreement and an individual lives in one of those states and works in the other, the individual will only be subject to the income tax in the state where he lives. All states with reciprocal agreements have provisions that exempt an employee from having the tax withheld for the state where he works, but employers are not required to withhold the tax for the state where the employee lives. On the other hand, even though it is not mandatory, a great many employers will establish an account with a reciprocal state and withhold the tax for the employee's state of residence. For instance, in Pennsylvania the form not only declares that the employee is exempt from PA income tax withholding, but it authorizes the employer to withhold the tax for the state where the employee lives.

State

States with State Tax Reciprocal Agreements

Exemption Form

Pennsylvania

Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia

REV-420

 

So, for those PA employees who reside in NY, NJ or VA set up that employee as a resident of their own state as follows.

In Preferences, Payroll, Tax Liabilities, you must add the employee’s state of residence. 

 

                   

You may add the Vendor for the Resident State also. This way, when payroll is processed, an AP invoice will be generated for the employee’s state of residence as well as the state of employment.

 

Now, you may add this as the state of residence for the employee.

This setup is now complete for an employee who does not have a reciprocal agreement, and who must pay taxes in both states such as those who work in PA but live in NY.

If the employee works in PA but lives in a state that has reciprocal agreement (such as NJ or VA), you may enter exemptions ‘99’ into the State exemptions on the Salary information tab for the employer state. This will prevent taxes being taken for the employer state but still take taxes for the resident state.

), you may enter exemptions ‘99’ into the State exemptions on the Salary information tab for the employer state. This will prevent taxes being taken for the employer state but still take taxes for the resident state.

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