Philadelphia maintains a requirement of employment test. Absent the pandemic, the city's position has historically been that a nonresident is not subject to the city's wage tax for any time spent outside of Philadelphia as required by his or her employer.
However, the nonresident is subject to the wage tax for any time spent working outside of the city for the nonresident employee's convenience. Applying that historical position to the COVID-19 working environment, the Philadelphia Department of Revenue asserted that any nonresident employee who was required by his or her employer to work from home because of the pandemic would not be subject to the wage tax.
Wage Tax Refunds Related to COVID-19
Because the pandemic created a remote environment unlike anything anyone had ever seen, Philadelphia is likely to see a flood of refund petitions from nonresidents.
The city created two new procedures to handle the influx. The first is a bulk submission that an employer can submit on behalf of its employees. The second is a COVID EZ form designed for nonresident employees who are seeking a refund solely because they were required to work from home due to the pandemic.
The COVID EZ form can be submitted online or via snail mail, but will be processed faster if submitted using the former method.
The employer bulk application is a first for the city — and is only available for 2020. An employer opting for the bulk submission must provide a list of information about each employee and calculate each employee's refund. The city will send the refunds directly to the nonresident employee — thus, employers must ensure that the employees' addresses are correct. If a group application is filed, the nonresident employee is no longer permitted to file an individual refund petition.
While some employers are submitting the bulk application, many employers appear to be shying away from the bulk application due to concerns over potential audit exposure and liability, as well as the administrative hassle associated with preparing the bulk submission.
Thus, the more common route for a refund will likely be the COVID EZ form. The form is completed by the nonresident employee and must be accompanied by a complete W-2 and a letter from the employer stating when the employee was required to work from home during 2020.
While many nonresident employees are looking forward to receiving a refund from the city, some may be in for a disappointment. Many employers did not — and do not — understand how their work-from-home policies affect their nonresident employees' wage tax liability. During certain periods of 2020, some employers affirmatively prohibited employees from working in the office.
Conversely, others took a less stringent approach and placed the onus on the employee to determine whether or not they should be in the office. Under the city's policy, those lax policies would not entitle the nonresident employees to a wage tax refund. Thus, some employees may be shocked when they learn their refund request has been denied.
Additionally, employers should be cautious not to represent that an employee was required to work-from-home if the employer's policies during 2020 do not support such an assertion.
What Does the Future Hold for the Wage Tax?
During 1939, Philadelphia became the first municipal government to levy an income tax, successfully implementing a 1.5% tax on income from wages and salaries. Over 80 years later, the wage tax typically accounts for over 40% of the city's general fund revenue. The nonresident portion accounts for over 10% of the general fund revenue, or roughly $600 million annually.
With the inoculation of all adults against COVID-19 on the horizon, there is hope that the pandemic will soon run its course. However, it is likely to have a lasting impact on revenue generated from the city's wage tax. Prior to the pandemic, many employers still emphasized face time and some were hesitant to allow employees to work from home.
The pandemic forced industries to quickly adjust to remote working environments. To the shock of many employers, many employees functioned quite well at home and some even more efficiently. Additionally, some employees have become accustomed to the flexibility and convenience working remotely provides.
Yet, this is not the death of the office — there are certainly some employees who prefer an office environment and others who need an office to function. Nevertheless, many employers will have a difficult time convincing all their employees to return to the office full-time post-pandemic when those employees have proven their ability to function well remotely.
In response, some employers may downsize office space, making it optional or a requirement for some employees to work remotely on a permanent basis. The question is — how will these lasting changes in the working environment impact the wage tax?
On the nonresident side, each employer's policy will be key to determining whether a change in working locations affects the future of the wage tax. If employers create a policy that allows for flexibility and permits an employee to choose whether to be in the office, the nonresident's wages will continue to be subject to the tax, despite working remotely.
However, if the employer states that an employee is required to work from home certain days of the week, that employee should not be subject to the wage tax on the portion of time required to be worked outside of the city.
The wage tax may take a permanent hit not only on the nonresident side, but also on the resident side. The pandemic pushed many city dwellers into the suburbs. If those individuals become permanent suburbanites, the city will lose some revenue on the resident employee side too.
The consequences of the pandemic on the wage tax will not be ascertainable for months — until the city has processed refunds and determined the true effect on its revenue. However, Philadelphia relies very heavily on its wage tax and the effects of the pandemic and resulting budget deficits will highlight that fact and could indicate a permanent revenue issue for the future.
Jennifer W. Karpchuk is a shareholder and co-chair of the state and local tax group at Chamberlain Hrdlicka White Williams & Aughtry.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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