July 14, 2021 | Payroll Software | Posted by Clark Sells, Group Product Manager at Ascentis
How to Manage Complex Payroll Tax Laws Across Multiple Jurisdictions
Payroll tax can be a complicated topic under the best of circumstances, and it becomes all the more complex for employers managing payroll across multiple jurisdictions. The modern workforce covers a wider range than ever before, with businesses employing workers across multiple cities, states, and even countries. While that flexibility opens up a lot of benefits in terms of recruiting and productivity, a wide range of rules and regulations in different locations also creates new challenges for compliance and consistency across an organization. Keeping track of ever-changing tax laws in even one location can be a challenge. Managing compliance rules for multiple cities and states at the same time can seem like an insurmountable task.
To illustrate that point, let's take a look at some recent changes in payroll tax law in two U.S. locations.
Philadelphia Alters Wage and Earnings Taxes
Beginning July 1, the city of Philadelphia has decreased wage tax and earnings tax rates for residents while upping the same for non-resident workers. To define those terms, a wage tax is an amount withheld from an employee's regular wages by an employer and remitted to the city on behalf of the employee. If an employer does not withhold a wage tax, the employee is responsible for applying for a city wage account number and paying and filing that amount as an earnings tax. Residents of the city will now pay a tax rate of 3.8398%, a small but significant reduction from the former rate of 3.8712%. Non-residents will now pay a rate of 3.4481%. These taxes apply to all forms of compensation, including salaries, hourly wages, and commissions.
These changes were motivated by a significant shift in tax revenue during the pandemic. Philadelphia's wage tax was originally established in 1939 as a way for the city to pay for public services. It quickly became a major source of funds for the city, accounting for as much as 45% of Philadelphia's annual budget. As the nature of the workplace evolved over the decades, however, more employers and employees moved to suburban settings and other locations outside of Philadelphia city limits. The wage tax system progressively became a less reliable source of municipal income. When the pandemic hit and much of the workforce moved to remote work -- office occupancy within the city stood below 10% for the duration of the shutdown -- it became clear that something had to change.
The newly adjusted wage and earning taxes seek to offset an estimated $78 million decline in city revenue over the past year. By raising wage taxes on non-residents, Philadelphia is attempting to recoup those losses while planning for a future where non-resident labor will play a much larger role in most cities' workforces. At the same time, lowering those taxes for residents may incentivize more employers and employees to stay within the city limits.
Washington State Supports Long-Term Care with Payroll Tax
Beginning in 2022, all businesses employing any workers in the state of Washington will be subject to a new payroll tax that supports the state's Long-Term Services and Supports Trust Program (LTSS), also known as the WA Cares Fund. This program is designed to provide financial backing for services that offer assistance to citizens with long- and short-term healthcare needs. Some of the services provided by WA Cares include access to assisted living facilities, home healthcare, assistive tools such as wheelchairs ramps, and home meal delivery.
Under WA Cares, the state will impose a 0.58% premium assessment on all Washington employee wages. Revenue from that added payroll tax will provide much of the funding for the LTSS Program. There are some exemptions, including self-employed workers, federal and tribal employees, and certain union employees. For the most part, however, this payroll tax will apply to any employer with employees based in Washington State, whether or not the employer itself calls Washington home.
What’s the secret to compliance with complex payroll tax laws?
These two recent changes to payroll taxes in specific locations demonstrate how widely tax compliance can vary depending on the location of a business or its employees. While these taxes will likely be fairly straightforward for an employer with a single location in Philadelphia or Washington, they create a more complicated situation for, say, a transport company with hubs in several states, including Washington. In that example, the employer is responsible for correctly withholding that 0.58% payroll tax from the wages of only its Washington-based employees while also abiding by all payroll taxes required by the other states and cities that house its other branches.
That’s a lot of moving pieces and variables for a payroll manager to keep track of by hand, even within a single business location. The Philadelphia wage tax, for example, requires an employer to correctly manage the dynamics between each individual employee’s home and work locations. The different withholding rates for residents and non-residents can have a significant financial impact on both the employee and employer. For a business with facilities in multiple locations with different approaches to wage taxes, the complexity can become downright baffling.
This is where an automated solution like Ascentis payroll systems becomes essential for employers with a multi-jurisdictional reach. Our tools help take the confusion out of navigating tax laws that vary between states, counties, and municipalities. Some of the support and service Ascentis payroll solutions can provide include:
- A single employee pay statement detailing all state and local taxes
- A payroll audit report detailing multiple tax rates
- Filing deadlines for all taxes remitted to each specific jurisdiction
- Reciprocity rules respective to applicable tax rates for each employee’s work/live state combination
If your organization employs workers in multiple states or even in different cities, compliance with all applicable payroll tax rules is a crucial consideration for your business. Schedule a demonstration today to see how Ascentis can help make your multi-jurisdictional payroll needs easier to manage.
Clark leads the Payroll, Tax, and Mobile product teams at Ascentis. In this role he is responsible for leading the payroll compliance product development life cycle. Clark has experience in building, implementing and maintaining payroll and tax software for employers and payers of all volumes. In addition to payroll, Mr. Sells has product strategy experience in multiple tax regimes including: 1099, FATCA, CRS and ACA. He is a subject matter expert in the area of taxpayer identification number matching, non-wage and state reporting. He is a former chair of the IRPAC’s Employer Information Reporting and Burden Reduction Committee (EIRBR) and former member of the Internal Revenue Service Advisory Committee (IRSAC). Previously in his career he held product management roles at Ceridian, where he focused on the creation of the on-demand payment platforms, an industry principal role at Sovos Compliance, and has worked in various global treasury services roles within Bank of America and Ameriprise Financial.