In response to the rise in hybrid work policies brought about by the COVID-19 pandemic, the Philadelphia Department of Revenue (Department) published enhanced guidelines concerning the application of its wage tax when employees of Philadelphia employers work from their homes outside of the City.

The latest guidance includes examples that provide important insights into how the Department has long implemented its convenience of the employer rule.

Background

In most states and localities, the default rule is that employees who are residents of one jurisdiction but work from home for an employer in another jurisdiction are taxed only on wages earned for days they are present in the nonresident jurisdiction.

However, in some states and localities, when employees work from home for an employer in another jurisdiction, they are subject to nonresident tax on wages earned both within and outside of the nonresident jurisdiction (termed "the convenience of the employer rule"). States that currently impose the convenience of the employer rule include Alabama, Connecticut, Delaware, Nebraska, New Jersey, New York and Pennsylvania.

Generally, these jurisdictions impose the rule only when employees work from home for their own convenience and not the necessity of the employer; however, this is not always the case. For instance, Alabama imposes its convenience of the employer rule whenever employees work for an Alabama employer from their homes outside of Alabama. (See EY Tax Alert 2023-0609.) Connecticut and New Jersey apply the rule to nonresident employees only if the rule is also imposed by those employees' resident states.

Additionally, jurisdictions apply varying standards in their application of the rule. For example, New York has an elaborate test outlined in TCB-M-06(5)I.

Application of Philadelphia's wage tax under its convenience of the employer rule

The following summarizes how the Department applies its convenience of the employer rule based on the examples included in its latest guidance.

Employees work for a client outside of Philadelphia (example 1)

Wages paid for work performed for a Philadelphia-based employer at a client location outside of Philadelphia is exempt from the Philadelphia wage tax.

Employees choose to work from home outside of Philadelphia (examples 2 and 5)

If employees working for a Philadelphia-based employer choose to work from home outside of Philadelphia, their wages for work performed from home are subject to the Philadelphia wage tax.

Employees merely assigned to an office within Philadelphia (example 4)

Wages earned for work performed at the home outside of Philadelphia are exempt from the Philadelphia wage tax if the employee: (1) is merely assigned to the Philadelphia office and there is no other connection to the Philadelphia-based employer, (2) reports to work in the Philadelphia office no more than two times per year, (3) does not have a dedicated workspace in the Philadelphia office, and (4) does not have the option to work in the Philadelphia office.

Employees work from home outside of Philadelphia due to a disability (example 6)

If a Philadelphia-based employer allows an employee to work from home outside of Philadelphia as an accommodation under the Americans with Disabilities Act, the wages paid for work from home outside of Philadelphia are exempt from Philadelphia's wage tax.

Employees work from home outside of Philadelphia due to a medical condition (example 7)

If a Philadelphia-based employer has a policy requiring that employees with underlying medical conditions work from home outside of Philadelphia, the wages paid for work from home outside of Philadelphia are exempt from Philadelphia's wage tax.

Employees work from home outside of Philadelphia to care for their children (example 8)

If a Philadelphia-based employer allows employees to work from home because they are unable to find adequate childcare, the wages paid for work from home outside of Philadelphia are subject to Philadelphia's wage tax.

Ernst & Young LLP insights

Like Pennsylvania's income tax, Philadelphia has adopted the convenience of the employer rule for wage tax purposes; however, the same is not true of other Pennsylvania localities with an earned income tax (EIT) governed by Pennsylvania Act 32.

Under Act 32, EIT withholding is determined by comparing the employee's resident EIT rate to the employee's work location EIT rate and withholding at the highest rate of the two. Philadelphia is not governed by Act 32. (Pennsylvania Department of Community and Economic Development, Local withholding tax FAQs.)

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor