In Pennsylvania, payroll includes the process of compensating your workers. This process includes calculating how much they’ve earned, making deductions, and following specific state rules about taxes related to payroll. It’s important to understand these unique state laws to manage payroll efficiently.
In this article, we offer a step-by-step guide designed to help Pennsylvania businesses navigate each pay period accurately. Managing payroll isn’t just about giving employees their paychecks; it’s about taking care of your employees and following complex rules, which can be especially challenging for new businesses.
Our guide aims to provide direction in handling payroll processes. You’ll find helpful insights and instructions that are specific to Pennsylvania. This ensures that your payroll runs smoothly and follows all the necessary rules, no matter how much experience you have in managing it.
This Article Covers
Laws That Affect Payroll Procedures in Pennsylvania
Worker Classifications in Pennsylvania
Payroll Forms and Relevant Bodies in Pennsylvania
Applicable Taxes in Pennsylvania
- Employer Contributions
- Withheld from Employee’s Wages
- Additional Relevant Subtractions to Withhold on Behalf of Employees
Key Pay Elements That Impact Payroll in Pennsylvania
Step-by-Step Guide to Payroll in Pennsylvania
Laws That Affect Payroll Procedures in Pennsylvania
There are specific employment laws that employers and employees need to be aware about. These laws impact various aspects of the workplace, and include wage regulations, labor conditions, and employee leave policies.
Pennsylvania Laws
- Pennsylvania Labor Code: The regulatory framework governing employment, wages, and workers rights in Pennsylvania encompasses a wide range of provisions. These provisions address various aspects of the employment relationship, including the payment of wages, provisions for sick leave, and the administration of workers’ compensation.
- Overtime: In Pennsylvania, the criteria for overtime pay are determined by the number of hours worked beyond the standard 40-hour workweek. Any hours worked beyond this threshold are subject to overtime compensation, typically calculated at a rate of 1.5 times the regular hourly wage.
- Paid Breaks or Lunch Period: The labor laws of Pennsylvania do not impose a mandatory requirement on employers to grant specific breaks or meal periods to their employees. However, if employers choose to provide short rest breaks, usually lasting no more than 20 minutes, such breaks are generally considered compensable time, as stipulated by the Department of Labor (DOL).
- Unemployment, Disability, and Workers’ Compensation: Employers in Pennsylvania are obligated to participate in the state’s unemployment insurance program. Additionally, the state mandates both disability and unemployment insurance for workers. Workers’ compensation benefits are extended to eligible employees who experience work-related injuries or illnesses.
- Minimum Wage: Employers in Pennsylvania are obliged to adhere to the federal minimum wage rate as established by the Fair Labor Standards Act (FLSA). The federal minimum wage is currently $7.25 per hour.
- Paid Time Off and Leaves: Pennsylvania follows federal labor laws regarding compensation for various forms of leave, including sick leave, holiday leave, jury duty leave, voting leave, and bereavement leave. Employers in Pennsylvania are generally not compelled to provide compensation for such leaves. However, certain exceptions or local ordinances may apply.
- Payment Records: Employers in Pennsylvania are mandated to furnish pay stubs to employees either semi-monthly or at the time of each wage payment. These pay stubs must contain essential information, including the employer’s name, address, detailed deductions, and other information as required by law.
- Final Paycheck: In cases of employee termination or departure, Pennsylvania law typically requires employers to promptly provide the employee with their final paycheck. This final compensation should include all earned wages, including any accrued vacation pay, in accordance with state regulations.
Federal Laws
- Fair Labor Standards Act (FLSA): The FLSA is a vital federal statute that sets regulations for hourly wage rates, overtime provisions, employee categorization, child labor constraints, and guidelines for the accurate recording of working hours.
- Family and Medical Leave Act (FMLA): The FMLA governs employee leave entitlements. It permits eligible employees to take up to 12 weeks of unpaid time off for reasons such as childbirth, adoption, or caring for a seriously ill family member.
- Federal Insurance Contributions Act (FICA) Tax: The FICA Tax is a federal payroll tax in the United States. Both workers and employers contribute to it, and its purpose is to provide financial support for Social Security and Medicare, which assist retirees, individuals with disabilities, and the dependents of deceased employees.
HR Laws
- New Hire Reporting: In Pennsylvania, when you hire, recall, or rehire a new employee, it’s essential to follow the New Hire Reporting rules. You have a seven-day window to inform the relevant department about these new additions. The notification must include basic details like the employee’s full name, address, social security number, and their start date. Additionally, you need to provide your business information, including your name, address, and state and federal identification numbers.
- Posting Requirements: If you run a business in Pennsylvania and have employees, you must display labor law posters in your workplace. These posters cover important topics like minimum wage, safety guidelines, and other essential labor laws. This is a formal requirement to make sure your employees are aware of their rights and responsibilities under Pennsylvania labor laws. Complying with these posting requirements is crucial to avoid any legal issues.
Worker Classifications in Pennsylvania
Employees and Independent Contractors
It’s crucial for employers to understand and adhere to the correct employee categorization. This classification significantly impacts not only payroll management but also influences the entitlements and legal protections that employees receive.
When an individual is classified as an employee, their earnings are subject to state unemployment taxes, potentially making them eligible for unemployment benefits. On the contrary, if they are identified as an independent contractor, the employer is relieved of the obligation to pay state unemployment taxes on their earnings, and the work they perform falls outside the realm of covered employment.
Furthermore, independent contractors do not enjoy the same legal privileges as employees. These include:
- Adherence to minimum wage requirements.
- Qualification for overtime pay.
- Access to workers’ compensation benefits.
To learn more about the rights of salaried and hourly employees, you can read our guides on your rights as a salaried employee in Pennsylvania, and your rights as an hourly employee in Pennsylvania.
The AC Test in Pennsylvania
Pennsylvania used to have a three-part ABC Test, but now they have a simplified version called the “AC Test.” If you provide services for pay, you are considered an employee by default, unless the employer can prove two things: (1) the worker is free from their control, both in the contract and in practice, and (2) the worker usually works in a separate trade, job, or business. This means that the burden is on the employer to show that the worker meets these two conditions to be classified as an independent contractor.
Payroll Forms and Relevant Bodies in Pennsylvania
Pennsylvania Payroll Forms
- Form PA-40: The Pennsylvania Individual Income Tax Return is used by employees to report their state income tax liabilities. Employers may provide this form to employees to help them with their state income tax filings.
- Form UC-2: The Pennsylvania Employer’s Quarterly Report is used to report employee wages and unemployment compensation contributions to the Pennsylvania Department of Labor and Industry. Employers must submit this form on a quarterly basis.
- Form PA-W3: The Pennsylvania Reconciliation of Income Tax Withheld is used to report total state income taxes withheld from employees during the year. Employers must submit this form along with Form W-2 to the Pennsylvania Department of Revenue.
Federal Payroll Forms
- W-4 Form: This form helps employers to determine the accurate amount of tax to withhold from their employees’ paychecks.
- W-2 Form: This form reveals the total annual earnings of each employee.
- W-3 Form: This form serves as a summary of the combined pay and taxes for all employees.
- Form 940: It is used to report unemployment taxes to the IRS.
- Form 941: This form reports income and FICA taxes withheld from paychecks on a quarterly basis.
- Form 944: It reports annual income and FICA taxes withheld from paychecks.
- 1099 Forms: These forms provide independent contractors with the necessary information to calculate the taxes they owe to the IRS based on their earnings.
- Form I-9: This form is employed to verify the identity and work eligibility of individuals employed in the United States.
Federal and Pennsylvania Payroll/Tax Bodies
- Internal Revenue Service (IRS): The IRS serves as the federal agency tasked with the collection and enforcement of federal taxes, encompassing income taxes, Social Security taxes, and Medicare taxes. Employers are obligated to report and forward federal payroll taxes to the IRS.
- Social Security Administration (SSA): The SSA manages the Social Security program, including the collection and disbursement of Social Security taxes. Employers are responsible for deducting and transmitting Social Security taxes on behalf of their employees.
- U.S. Department of Labor (DOL): The DOL enforces federal labor laws and regulations like the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). Employers must adhere to these laws pertaining to minimum wage, overtime, and family leave policies.
- Pennsylvania Department of Revenue: The PA Department of Revenue oversees the collection and enforcement of Pennsylvania state income taxes. Employers are mandated to report and remit state income taxes to the Pennsylvania Department of Revenue.
- Pennsylvania Department of Labor & Industry: This department manages labor-related matters in Pennsylvania, including minimum wage, unemployment compensation, and workplace safety. Employers are required to conform to state labor laws and regulations, in addition to federal requirements.
- Pennsylvania Department of Community and Economic Development (DCED): The DCED administers a variety of tax incentive programs in Pennsylvania that can impact businesses and their tax obligations. Employers may need to navigate these programs and tax incentives.
- Pennsylvania Workers’ Compensation Commission: The Pennsylvania Workers’ Compensation Commission supervises the workers’ compensation program in Pennsylvania, ensuring that employees who sustain job-related injuries receive appropriate benefits.
Applicable Taxes in Pennsylvania
Employer Contributions
Federal Unemployment Tax Act (FUTA): Pennsylvania complies with the Federal Unemployment Tax Act (FUTA). Currently, a standard federal rate of 6.0% is applied to the first $7,000 of each employee’s earnings.
Withheld from Employee’s Wages
- Pennsylvania Income Taxes: The state applies a flat 3.07% income tax rate to an employee’s total earnings. Additionally, various Pennsylvania municipalities may impose local income taxes with rates varying by city.
- Workers’ Compensation in Pennsylvania: Employers in Pennsylvania must provide workers’ compensation insurance if they employ at least one worker for more than 35 hours a week for a minimum of 13 weeks within a year. This requirement extends to employers with a workforce of at least one employee, including part-time personnel. The cost of workers’ compensation coverage is typically determined as a percentage of payroll, influenced by factors like the industry and the employer’s claims history.
- Social Security (FICA) Withholding: Social Security withholding, commonly referred to as the FICA tax, involves deducting 6.2% from an employee’s earnings on income up to a specified annual limit, which may change from year to year. As of [year], the maximum withholding is capped at $[maximum limit]. Furthermore, there is a separate deduction for Medicare, specifically the Hospital Insurance component, which constitutes 1.45% of all employee earnings.
Additional Relevant Subtractions to Withhold on Behalf of Employees
Pennsylvania employers must adhere to federal and state regulations on paycheck deductions. The federal Fair Labor Standards Act (FLSA) outlines permissible deductions, including those for personal absence (excluding sickness or disability cases), sickness or disability-related absences, jury and witness fees, safety violations, and disciplinary suspensions. Employers can also deduct funds for unpaid leave taken under the Federal Family and Medical Leave Act, which provides job-protected leave for specific family and medical reasons.
Key Pay Elements That Impact Payroll in Pennsylvania
Minimum Wage
The existing minimum wage in Pennsylvania stands at $7.25 per hour for non-tipped workers, while tipped employees are entitled to a minimum wage of $2.83 per hour. These minimum wage rates are in accordance with federal regulations concerning exceptions from mandatory minimum wage requirements.
Overtime
Regarding overtime regulations, Pennsylvania follows the overtime laws outlined in the federal Fair Labor Standards Act (FLSA). The general principle dictates that if an employee works more than 40 hours in a workweek, they should receive overtime pay at a rate of 1.5 times their regular hourly wage. Given Pennsylvania’s minimum wage, which is $7.25 per hour in 2024, this translates to an overtime rate of $10.88 per hour.
Workers’ Compensation Insurance
Pennsylvania’s workers’ compensation programs provide a safety net for employees facing work-related injuries or illnesses, offering disability benefits to those unable to work due to workplace-related issues. This coverage includes medical expenses for workplace injuries and illnesses, with employers protected by exclusive remedy provisions.
While Pennsylvania law mandates workers’ compensation for employers with at least one employee, there are exemptions for specific categories. The comprehensive coverage extends to various expenses, such as accidents, injuries, illnesses, wage loss, ongoing medical care, funeral costs, and compensation for temporary or permanent disabilities resulting from work-related factors, emphasizing the importance of staying updated on evolving labor laws and regulations in the state.
Pay Stub Laws
Pennsylvania employers are obligated to follow federal laws governing wage payment methods and pay frequency. They must comply with the wage payment and frequency regulations established by the federal Fair Labor Standards Act (FLSA). Under the FLSA, employers are required to maintain accurate records of employees’ hours worked and wages paid to them. It’s important to note that the FLSA does not explicitly mandate employers to provide pay stubs, which may be referred to as wage statements or paychecks. Employers in Pennsylvania may choose to issue pay stubs as a matter of company policy or to meet state-specific requirements.
Wage Garnishment
Wage garnishment laws in Pennsylvania, like in many other states, are subject to both federal and state regulations. Under federal law, governed by the Consumer Credit Protection Act (CCPA), the maximum amount that can be garnished from an individual’s earnings is generally capped at 25% of disposable income. Various types of debts, such as child support, alimony, student loans, and unpaid taxes, can be subject to garnishment. For other debts, like credit card or medical debt, a court judgment is typically required before garnishment.
Pennsylvania law aligns with federal wage garnishment regulations and provides employees with protection from termination due to a single wage garnishment. However, this protection does not extend to multiple garnishments. Prior to garnishment, creditors must provide notice to the debtor, who has the right to dispute the debt or request a hearing. State law addresses the prioritization of different types of debts and outlines the garnishment process.
Final Paycheck
In Pennsylvania, there are no specific rules regarding the timing of the issuance of a final paycheck. According to the Fair Labor and Standards Act (FLSA), employers must provide the final payment on the next scheduled payday, whether an employee resigns or is terminated. This final paycheck should include the employee’s regular earnings from the most recent pay period, as well as any other eligible forms of compensation, such as commissions, bonuses, and accrued sick and vacation pay.
Step-by-Step Guide to Payroll in Pennsylvania
- Register Your Business as an Employer with the IRS: Initiate the process by acquiring your Employer Identification Number (EIN) and setting up an account within the Electronic Federal Tax Payment System (EFTPS). For new businesses, securing an EIN is a prerequisite before embarking on creating a customized, systematic payroll process flowchart. The EIN, composed of nine digits, serves as a distinct identifier used by the Internal Revenue Service (IRS) to monitor a company’s tax-related activities. You can conveniently apply for an EIN online using Form SS-4.
- Registering with the Commonwealth of Pennsylvania: If your business operates in Pennsylvania, it is essential to register it with the state. New businesses can complete the registration process through the official website of the Pennsylvania Department of State. Additionally, any business compensating employees in Pennsylvania must also register with the Pennsylvania Department of Revenue.
- Proper Employee Classification: Accurately classify your workforce as employees or independent contractors. Precise classification is critical as it directly affects tax obligations and wage reporting. Misclassification can result in legal ramifications and financial penalties. Consider employing the Common Law Test as a reliable guide.
- Gathering Employee Payroll Documents: When hiring in Pennsylvania, ensure you collect specific forms during employee onboarding. Employees should complete the I-9 verification and Pennsylvania’s equivalent of the W-4, known as the Employee’s Withholding Tax Exemption Certificate (Form PA-W-4).
- Effective Time and Attendance Tracking: Implement a comprehensive system for tracking employee time and attendance. This system should cover areas like defining workweeks, calculating overtime, managing break times, and overseeing leave entitlements. Tools like time and attendance software allow you to enhance accuracy and efficiency in time tracking
- Establishing a Consistent Payroll Schedule: Establish regular pay periods and ensure employee paychecks are issued within these defined timeframes, adhering to state regulations and compliance standards.
- Compliance with Federal Payroll Taxes: Adhere to IRS guidelines for federal payroll taxes, including unemployment tax. Deposit employment taxes based on your assigned schedule, whether it is monthly or semiweekly, as determined by the IRS.
- Diligent Record Maintenance and Archiving: Maintain comprehensive records for all employees, including former ones, for an extended period in line with federal guidelines.
- Annual Payroll Reporting: Annually, compile essential payroll reports, including W-2 Forms and 1099 Forms. Furnish these forms to employees no later than January 31 of the following year.
Final Thoughts
Managing payroll in Pennsylvania can be challenging. Employees must ensure they adhere to Pennsylvania’s payroll regulations. To simplify the process of managing payroll, consider exploring our list of the top 6 applications tailored to streamline payroll responsibilities in the United States. If you’ve already established a payroll system, we’ve provided ten tips to enhance your payroll procedure within the United States.
Important Cautionary Note
This content is provided for informational purposes only. While we make every effort to ensure the accuracy of the information presented, we cannot guarantee that it is free of errors or omissions. Users are advised to independently verify any critical information and should not solely rely on the content provided.
