Pennsylvania deffered compensation program

These agreements apply to employee compensation only. They do not apply to income reported as compensation when there is no federal withholding requirement, such as executor fees or director fees, nor does it apply to any other class of income.

Complete a new REV every year or when your personal or financial situation changes. Photocopies of this form are acceptable. File early so you will have your refund before the due date for paying your Pennsylvania tax liability.

If you are a resident of a reciprocal agreement state working or performing services in Pennsylvania and your employer withheld Pennsylvania income tax, you may request a refund of the Pennsylvania tax. You report zero taxable compensation on Line 1a and the Pennsylvania tax withheld on Line Also, submit a statement explaining that you are a resident of a reciprocal agreement state.

Under Act , the federal constructive receipt rules relating to nonqualified deferred compensation plans and unfunded section deferred compensation plans were made applicable for personal income tax purposes. If you receive distributions of previously taxed elective deferrals, complete and include with your return the PA W-2 RW, Reconciliation Worksheet.

When reducing their workforces, many employers offer temporary incentives for employees voluntarily to separate from employment, including affording early retirement incentives that are available only for a limited period of time. Many employers also afford involuntarily terminated employees extra pay. The extra pay may be paid in return for agreements releasing legal claims to avoid the risk of RIF-related litigation.

It may also be paid to help workers transition to new employments or simply to part ways with employees on as amicable a basis as possible. If a member of the clergy is considered a "common law employee," the cleric's occupancy of a parsonage owned by the congregation and provided for the convenience of the congregation is not taxable as compensation. Likewise, if the congregation pays the costs of housing directly and not as a reimbursement to the clergy, the direct costs are not taxable.

All housing allowances provided by the congregation to clergy are taxable as compensation, as cash is always taxable. If a member of the clergy is not a "common law employee" and is a sole proprietor who offers his services in a market place i. For Pennsylvania personal income tax purposes, individuals shall report all taxable remuneration they receive as a statutory employee as compensation unless their activities constitute a business, profession, or other activity engaged in as a commercial enterprise.

Unless there is an intention to change his or her domicile by following military procedures to do so, a person generally does not change his or her domicile by entering the U.

Armed Forces. A person in the U. Armed Forces is not precluded from acquiring a new domicile where his or her family is stationed. Armed Forces or Foreign Service, or a person living in a foreign country for other than a temporary or transitory purpose while a lawful permanent resident or citizen of that country, is treated as a domiciliary of that country if the person:.

Bonuses are always taxable as Pennsylvania personal income tax compensation. Incentive pay is always taxable as Pennsylvania personal income tax compensation. Commissions are always taxable as Pennsylvania personal income tax compensation. Tips and gratuities are always taxable as Pennsylvania personal income tax compensation. Any vacation, holiday, sabbatical, sick leave, or other guaranteed pay an employee receives as an incident or benefit under a work agreement is taxable on the same basis as the base pay the employee receives for periods the employee is not absent from work, provided the payment is:.

Payments, including payments made by third party insurers for sickness or disability, are not taxable income for Pennsylvania purposes. If the employer includes this income and withholds Pennsylvania tax, the taxpayer must obtain and submit a corrected W—2 form or a statement from the employer explaining the error.

Payments are considered to be computed without reference to the nature of a disability if, under the plan, they can be made for injuries or diseases:. Such payments are taxable even if length of service is not a factor either in determining eligibility for, or the amount of, payment. However, amounts specified in a qualifying cafeteria plan document as being available to the employee for the purpose of selecting or purchasing benefits under a plan or as additional cash remuneration received in lieu of coverage under a plan are excludible from tax and withholding if the following apply:.

Strike benefits are not taxable for Pennsylvania personal income tax purposes. Group term life insurance is never taxable for Pennsylvania personal income tax purposes, regardless of the amount. Unemployment compensation is not taxable for Pennsylvania personal income tax purposes.

Workers compensation is never taxable for Pennsylvania personal income tax purposes. Generally, a scholarship or fellowship award made on the basis of need or academic achievement is not taxable if awarded to encourage or allow the recipient to further his or her educational development.

If the recipient is required to apply his skill and training to advance creative worth or some other project, the scholarship may be taxable. Refer to above discussion on stipends. In order to substantiate that a scholarship or fellowship is not taxable, include a letter with an original signature of the department head or other official detailing the description of the program under which the award was received.

A form letter is not acceptable. Moving expense reimbursements for the personal expenses of an employee are considered compensation for personal income tax purposes. Reimbursements for title insurance premiums, notary fees, mortgage service charges, appraisal fees, credit report fees, daily living expenses, etc. When an employer rewards an employee in recognition for his or her performance, the cash or value of the award, unless de minimis under federal rules under IRC Section , is taxable Pennsylvania compensation.

However, an award out of detached generosity or in recognition for civic or humanitarian services is not taxable Pennsylvania compensation. Supplemental wages are compensation paid by or on behalf of a service recipient that are neither regular wages nor planned deferred compensation.

Common examples include tips, overtime pay, bonuses, back pay, commissions, wages paid under reimbursement or other expense allowance arrangements, wages paid as noncash fringe benefits, sick pay paid by a third party as an agent of the service recipient, income recognized on the grant or exercise of a nonstatutory stock option, and income recognized on the lapse of a restriction on restricted property transferred from an employer to an employee. In general, Sections , and of the Internal Revenue Code are inapplicable.

Section of the Internal Revenue Code, and related rules and regulations govern the taxability for Pennsylvania personal income tax. Incentive, statutory, and non-statutory stock options are taxable as Pennsylvania compensation on the earliest of the following dates:. The difference between the fair market value of the stock on the date of exercise or lapse as applicable and the amount paid by the employee to obtain the option, if any, is the amount subject to Pennsylvania tax when sold before lapse or exercise.

Pennsylvania personal income tax, unlike the Internal Revenue Code, does not contain provisions that distinguish between or among various types of stock options. Moreover, there are no PA provisions that distinguish between qualified stock options and those options granted under employee stock purchase plans. For federal income tax purposes, nonqualified stock options are taxable in the year they are granted if the option has an ascertainable market value at that time.

As a general rule, qualified stock options are subject to a greater number of conditions than other options and they must be satisfied for the employee to receive the favorable tax treatment under the Internal Revenue Code e. A qualified stock option is not taxable under the Internal Revenue Code at the time of its grant or at the time, the employee exercises the option IRC Section ; rather, the taxation of the stock option is deferred and is imposed as a capital gain when the employee sells the stock.

By regulation, it is taxable and subject to withholding if, the employer is required to withhold tax from the wages of its employee. The difference between the fair market value of the stock on the date of exercise and the amount paid by the employee to obtain the option, if any, is the amount subject to Pennsylvania tax.

Stock options are subject to withholding and reporting in the year that they are exercised unless the underlying stock is subject to substantial limitations or restrictions on its transferability or alienability. The difference between the option cost and the fair market value of the stock at the time the employee exercises the option is the amount subject to withholding and reporting.

There is no Pennsylvania personal income tax provision similar to an IRC Section 83 b election for federal income tax purposes. The restrictions imposed upon insider trading by Section 16 b of the Securities and Exchange Act is not considered substantial limitations or restrictions.

If there are some restrictions on the stock that are insubstantial, they will be a factor when determining the value of the option and underlying stock. Restrictions of this nature are one of many factors that may affect a stock's fair market value.

Only when one has actual or constructive receipt of his stock options does he have income for purposes of Pennsylvania personal income tax. The income realized will be the difference between the fair market value of the stock at time the restriction lapses and the fair market value at the time the options are recognized.

Stock options earned while working in Pennsylvania are subject to personal income tax even though exercised while a resident of another state. If a taxpayer works in multiple states and earns stock options in Pennsylvania and other states during his employment, the taxpayer is entitled to apportion the income earned based on the time taxpayer worked in Pennsylvania.

Please refer to regulatory section Applicable Option Date. Federal Treatment Employee. Federal Treatment Employer. Alternative minimum tax adjustment equal to the difference between exercise price of stock and fair market value of stock on exercise date. The value of the option less any amount paid for the option will be taxed as compensation. Capital gain equal to difference between sale price of stock and exercise price of option.

Gain or loss on the sale of the stock is the difference between the sale price and the taxpayer's basis in the stock which equals the exercise price of the option plus any compensation recognized as a result of exercising the option.

PA PIT was amended to make, with certain exceptions, section 83 of the IRC of and regulations applicable for taxable years beginning after December 31, , respect to property transferred to a service provider or beneficiary in connection with the performance of services.

Option has readily ascertainable fair market value on date of grant Option fully transferable or not subject to risk of forfeiture. Compensation ordinary deduction equal to income subject to withholding or federal Form issued to employee or independent contractor.

Compensation deduction equal to income subject to withholding or federal Form issued to employee or independent contractor. Capital gain equal to difference between sale price and fair market value at the date of exercise option. Gain or loss on sale of the stock is the difference between the sale price and the taxpayer's basis in the stock which equals the exercise price of the option plus any compensation recognized as a result of exercising the option.

No tax impact. Option not publicly traded or does not have readily ascertainable fair market value on date of grant Option fully transferable or not subject to risk of forfeiture. The fair market value of the stock less any amount paid for the stock will be taxed as compensation. Compensation ordinary deduction equal to income amount recognized by employee.

Federal Nonqualified. Option has readily ascertainable fair market value on date of grant Option NOT transferable or subject to risk of forfeiture. Option does not have readily ascertainable fair market value on date of grant Option not transferable or subject to risk of forfeiture.

Gain or loss on the sale of the stock is the difference between the sale price and the taxpayer's basis in the stock which equals the exercise price of the option plus any compen-sation recognized as a result of exercising the option. All benefits other than for death, disability, hospitalization, and sickness are taxable under Pennsylvania personal income tax. Hospitalization, sickness, disability, death, supplemental unemployment benefits, or strike benefits are nontaxable under Pennsylvania personal income tax provided that the program does not discriminate.

The right to receive cash in lieu of the benefit is always taxable as Pennsylvania compensation. Under Pennsylvania personal income tax law, the following fringe benefits are not taxable:. The Pennsylvania Tax Reform Code of does not explicitly address how business expenses are treated. Commonwealth v. Staley , Pa. Further, the Court has held that amounts reimbursed by an employer for ordinary, actual, reasonable, and necessary business expenses are excluded from compensation.

Ritz v. Commonwealth , Pa. If parties to an employment contract recognize that the employee will pay for some business expenses out of his or her own pocket, these amounts may be excluded from income. However, personal expenses, including daily living expenses of an employee, may not be excluded from compensation.

Williamson v. Commonwealth , A. Under federal law prior to the Tax Cuts and Jobs Act of , employee expenses were accounted for on federal Form Not all expenses allowed for federal income tax purposes are allowable for Pennsylvania personal income tax purposes. Pennsylvania follows federal rules regarding accountable plans. Accordingly, if a plan is properly maintained under federal rules, reimbursed amounts are not included in Pennsylvania wages when the employee submits the expense to the employer for reimbursement and is reimbursed for the exact amount of those expenses.

For Pennsylvania personal income tax purposes, allowable employee business expenses are similar to, but not the same as, expenses for federal purposes. Pennsylvania law only permits expenses required to perform the duties of a job or profession.

An allowable Pennsylvania employee business expense must be all of the following:. A taxpayer may deduct percent of the Pennsylvania-allowable unreimbursed employee business expenses unless a specific provision or limitation applies. Unlike federal rules and limitations for percentage and accounting of the expenses, Pennsylvania law contains no such provisions. Do not include such reimbursements in gross compensation. Note: Expenses may not be deducted based upon federal per-diem allowances.

Only those expenses actually paid while performing the duties of employment may be deducted. Military personnel are not required to meet the distance test if the move is a permanent change of duty station.

If the taxpayer, spouse, and dependents are moving to the new duty station from different locations, all the allowable expenses may be claimed.

Expenses not properly listed under the Education Expense category will be denied by the department. Pennsylvania does not allow the following business expenses, even if allowed for federal purposes:. A taxpayer may use the working day or business volume method to determine their apportionable expenses for PA personal income tax purposes.

Part-year residents may only claim percent of unreimbursed business expenses if the expenses were incurred only while providing services in Pennsylvania or while a PA resident. Include a statement indicating the method used to determine the expenses for the period of residency.

The excess of expenses over compensation for one employer or taxpayer may not be deducted from the compensation earned from another employer or taxpayer. If an employer does not provide reimbursement, an employee may compensation by the allowable expenses actually incurred.

If a reimbursement is more than the allowable expenses, the excess must be reported as taxable compensation on Line 1a of the PA, Personal Income Tax Return. Pennsylvania generally does not recognize statutory employee income as business income if the income is reported on a W A statutory employee must report the income from a W-2 as compensation for PA personal income tax purposes and the business expenses must be included on PA Schedule UE.

While most expenses are allowable for reporting purposes on PA Schedule UE, the business expenses included on a federal Schedule C must be examined to determine if there any nonallowable expenses for PA Schedule UE purposes. For example dues to fraternal organizations or professional societies and dues and subscriptions expenses must be removed from the federal expenses.

A breakdown of the expenses must be included by a separate statement showing the description and amount of the expenses or by including a separate PA Schedule C to report the expenses.

All other information requested on Lines C though I and 1 through 5 in Part I is not required to be included. Typically with statutory employees, income is reported to them via two methods or documents - a federal Form W-2 and a federal Form MISC. In some cases, a portion of the income not included on a W-2 is also not reported on a MISC when the income is below the required federal reporting threshold.

However, such income is still required to be included by a taxpayer. If the income and expenses for each are not determined using separate accounting, the expenses may be allocated based upon the percentage of the income for each method of income reported to the taxpayer to the total income.

In such cases, all expenses included on a federal Schedule C must be allocated between the two reporting methods. If an expense is a nonallowable for PA Schedule UE purposes, it must still be allocated to that portion of the income.

However, the expense is not to be included with the total expenses for the income reported as compensation. The PA Schedule C reporting the income not reported as compensation and all its related expenses should have all the lines completed at the top of the schedule Lines A through I and 1 through 5. The main business activity would be included as the type of business, such as Insurance Sales. The department has determined that an advance or allowance for clothing is subject to tax unless it represents a reimbursement.

The employee must report all reimbursements and allowances as compensation unless:. An allowance is considered taxable Pennsylvania income if the employee receiving the allowance can use it at his discretion. An allowance for work clothing is included in Pennsylvania compensation, and, thus, taxed as income. However, a reimbursement paid to the employee for amounts he expended for a particular purpose is not income. Reimbursements for the purchase of work clothing are not income and costs in excess of the reimbursement are deductible to the employee.

Compensation does not include benefits payable by an employer or labor union under a supplemental unemployment benefit plan, whether payable on a periodic basis or in the form of cash, services, or property. Refer to 61 Pa. Example 1. An employee's use of the car is 75 percent business and 25 percent personal. The information listed below is required on Schedule UE.

Only expenses for which records exist or can be obtained will be allowable for Pennsylvania personal income tax purposes. The department does not permit the use of estimates or federal per diem allowances when calculating expenses.

The department has the legal authority to require evidence that the expenses claimed on a PA Schedule UE are allowable for Pennsylvania persona income tax purposes. Keep all necessary documents, receipts, vouchers and other records for at least four years. Federal courts have held that there are no provisions in either Title VII of the Civil Rights Act of or the ADEA that provide compensatory damages for pain and suffering or for emotional distress.

Burke, S. Schlieier, U. For Pennsylvania personal income tax purposes, damages for personal injury or sickness are excludable from Pennsylvania compensation. This includes emotional distress as well as physical injury. If a claim was brought under either Title VII of the Civil Rights Act of or the ADEA, the amounts received are meant to restore the worker to the wage and employment position that the worker would have occupied prior to the unlawful discrimination.

As mentioned above, damage awards received for personal injury or sickness are not taxable for Pennsylvania personal income tax. This includes federal taxable punitive damages. Damage award for lost profits or lost capital are taxable for Pennsylvania personal income tax.

Damage awards for lost profits are taxable under Pennsylvania personal income tax law. Damage awards for return of capital are taxable under Pennsylvania personal income tax law.

For Pennsylvania personal income tax purposes, legal fees directly associated with the receipt of a damage award or settlement award are offset against the damage award received. The offset occurs only within the class of income. Taxable gross compensation is not limited to employee compensation.

It also includes:. Honoraria are taxable for Pennsylvania personal income tax purposes. Executor fees are taxable as compensation. This includes executor's fees paid to nonresident executors and administrators for estates in Pennsylvania. An executor or executrix for an estate in Pennsylvania would be required to visit Pennsylvania to complete his or her duties.

The fact that the executor or executrix may use an agent to do the duties does not take away the fact that they had a presence in Pennsylvania and are subject to tax on that income.

The only apportionment to be done is to exclude that portion of the executor fee that represents the services performed outside of Pennsylvania for the convenience of the estate and by necessity out of Pennsylvania. An example would be an appearance in court outside of Pennsylvania involving the estate. The remainder of the fee would be taxable as compensation for Pennsylvania purposes by nonresident executors. Apportionment can only be done by the number of days required out of Pennsylvania over total days spent working on the estate, including the time of the agent.

Expert witness fees are taxable compensation for Pennsylvania personal income tax purposes. Fees received for participation as a jurist in a civil or criminal trial proceeding or for a grand jury are taxable compensation for Pennsylvania personal income tax purposes. Director fees are taxable compensation for Pennsylvania personal income tax purposes. If expenses are incurred while performing the duties as a director, those expenses that are directly related to that compensation may be claimed on PA Schedule UE, Allowable Employee Business Expenses.

Only individuals who clearly hold themselves out in the market place as a board director to multiple organizations and corporations may report the income and expenses on PA Schedule C, Profit or Loss from Business or Profession. For taxable years beginning on or after Jan. It may include:. Fees, commissions, rewards, golden parachute payments, damage awards, termination payments, fringe benefits or other items of non-employee compensation reported on federal Form —MISC are taxable as compensation.

A household employee, who can include babysitters, caretakers, nannies, health aides, private nurses, housekeepers, cleaning people, drivers, and yard workers, is a person hired to do any sort of household work as long as the employer retains the right to control the details of how the work is done.

This differs from house workers obtained through an agency or self-employed workers who retain control of how the work is done. Generally, a self-employed worker provides his or her own tools and offers services to the public as an independent business.

These individuals must file and report their income through the appropriate business schedule. Since household employees are not subject to federal income tax withholding although they may be subject to Social Security withholding , they are not subject to Pennsylvania income tax withholding.

If services are performed within Pennsylvania, the compensation for the services constitutes income from Pennsylvania sources, regardless of the following:. Some items of compensation may be based upon services relating to a single transaction or piece of work while other items may be based upon multiple transactions or piecework.

Some may be based upon services of a continuing nature or services that are frequently recurring; and some constitutes prepaid income. Accordingly, different rules for allocating income to Pennsylvania sources may apply.

They are explained below. If a nonresident traveling salesperson, agent or other employee receives a commission for sales made or the performance of other services based upon the volume of business transacted by him or her, his or her items of income derived from or connected with Commonwealth sources include that proportion of the amount of the items attributable to the business which the volume of business transacted by him within this Commonwealth bears to the total volume of business transacted by him within and without this Commonwealth.

If the amount of payment is based upon years of service or the total compensation received by the payee during his years of service, the payment shall be apportioned on the basis of the aggregated total number of working days worked within Pennsylvania during such years.

Compensation that is earned and paid—or is ordinarily earned and paid—on a weekly, biweekly, semimonthly, monthly, quarterly, semiannual or annual basis shall be allocated to Pennsylvania in the proportion that the total number of working days employed within Pennsylvania during the weekly, biweekly, semimonthly, monthly, quarterly, semiannual or annual period bears to the total number of working days during the period.

Miscellaneous compensation is compensation other than prepaid compensation, commissions, compensation based upon years of continued service, compensation from casual employments or compensation paid on a daily, weekly, biweekly, semimonthly, monthly, quarterly, semiannual or annual basis.

If its payment accrual period is not determinable, each payment of miscellaneous compensation shall be allocated to Pennsylvania in the proportion that the total number of working days employed within Pennsylvania during the last period of continuous employment preceding the payment bears to the total number of working days during such period.

Even when conditioned, directly or indirectly, on the future performance or refraining from performance of substantial services, payments for services not yet rendered are taxable to cash method taxpayers unless the possibility of forfeiture is substantial or they are repaid within the refundable period.

Amounts paid exclusively to provide reasonable compensation for future services such as a covenant not to compete, however, cannot be allocated on a working days basis unless and until all services fixing the right to retain the payment have occurred.

Accordingly, if the evidence shows that substantially all of the future services would have been performed in PA, then the prepayments are allocable to Pennsylvania. Otherwise, such amounts may be allocated only to the employee, director or officer place of residence at the time of payment.

Moreover, if there is no way to determine the portion of a payment attributable to prior or current services and the portion attributable to future services, the entire amount is allocable to prior and current services. A working day is any calendar day upon which compensable work is done, regardless of how short the time. In determining the number of working days:. Where a worker is provided with a suitable office or other workplace within Pennsylvania or is maintaining an office-in-home or other workplace within Pennsylvania, a working day is employed within Pennsylvania if either:.

Conversely, where a worker is provided with a suitable office or workplace outside PA or is maintaining an office-in-home or other workplace outside Pennsylvania, a working day is employed within Pennsylvania only if some of the compensable work done during the calendar day is done in Pennsylvania for the convenience, and of necessity in the service, of the employer. Time spent in performing the following services shall be disregarded in determining working days employed in Pennsylvania:.

In these instances, the compensation must be allocated only to the state or among the states where the employee is of necessity performing actual services in the service, and for the convenience, of the employer. A payment accrual period ends when all services fixing the right to receive, or the duty to pay, the payment have occurred. The period begins when any of the activities that is required to establish that right or duty is begun.

If an insolvent individual is not rendered solvent by the cancellation of debt, no income is recognized. Income from cancellation of debt is taxable in Pennsylvania in only two circumstances:. If the debt forgiveness relates to rent, royalty, patent, or copyright income, it is reported in that class.

An annuity that a service provider buys on his own, rather than through a qualified employer sponsored plan or individual retirement arrangement, is a non-qualified annuity. Amounts received under nonqualified annuities are not taxable as compensation. They constitute taxable interest to the extent they are includible in gross income for Federal tax purposes. If you invested in a retirement annuity that is not part of an employer-sponsored program or a commonly recognized retirement program, you have Pennsylvania-taxable income when you begin receiving annuity payments.

You must report the difference between the amount you receive and your previously taxed investment as taxable gain on a PA Schedule D, Sale, Exchange, or Disposition of Property. If you receive periodic payments, you use the cost-recovery method to report the taxable gain. For taxable years beginning after Dec. Any income from these types of plans that is taxable for federal income tax purposes is now taxable for Pennsylvania personal income tax purposes as interest income as a result of Act 40 of Jul.

Act 40 also provided that that amounts paid under contract of life insurance or endowment, which may be included in gross income for federal income tax purposes, are also subject to Pennsylvania personal income tax as interest income.

Previously, the income received from an annuity that you purchased, including a retirement annuity that is not part of an employer-sponsored retirement program was reported as gain on the sale, exchange, or disposition of property. Act —40 provides the taxability of an exchange of life insurance annuity contracts will follow the requirements of Section of the Internal Revenue Code.

Therefore, do not report the gain loss on the sale, exchange or disposition of any insurance contracts that include:. If the exchange of contracts has the effect of transferring property to a non-U. If cash or other boot is involved with the exchange of the contracts, the gain or loss is also not tax-exempt. Under these rules, if there is no cash involved, the exchange will be tax-free. If the exchange involves cash, the amount of cash received will be taxable as interest income. This shall apply to taxable years beginning after Dec.

A plan is considered an eligible Pennsylvania retirement plan if, at a minimum, the plan has four characteristics:. Employee contributions to any retirement plan are always taxable as compensation. A fact sheet that includes up-to-date information on the number of participants, contributions, and more. Plan Highlights Employees for most SERS-participating employers also have access to the Deferred Compensation Plan, which is a voluntary supplemental investment plan with tax deferred benefits.

Winter Fall Summer Spring Deferred Compensation Plan Snapshot A fact sheet that includes up-to-date information on the number of participants, contributions, and more.

Winter Fall Summer Spring Consolidate your assets into one easy-to-manage view. To roll in assets from a previous retirement account, Sign in to your account and click on your plan s listed under Total account balance.

Scroll down to Plan Information and click on Consolidate accounts. To change your personal information online, Sign in to your account and you can then update your account profile. Deferred compensation plans typically charge different fees to cover a variety of expenses. The good news is that the fees you pay to participate in your deferred comp plan are typically lower than what you might experience as an individual investor. With so many people participating in the deferred comp plan, you usually benefit from reduced fees.