Recently enacted Act 34, Section 202.3 (HB 1300), which is effective retroactive to January 1, 2023, excludes up to $5,000 per year of benefits under an IRC Section 129 dependent care assistance program from Pennsylvania income tax and withholding.

Dependent care assistance benefits

According to guidance from the Pennsylvania Department of Revenue (DOR), the types of dependent care assistance benefits now excluded from Pennsylvania income tax and withholding include:

• The fair market value of employer-provided daycare facilities
• An amount paid directly to a daycare facility by the employer or reimbursed to the employee to subsidize the cost
• Pre-tax contributions made by the employee under an IRC Section 125 dependent care assistance flexible spending account

Correcting 2023 wage and tax reporting

Due to the late passage of Act 34, Section 202.3 in 2023, the DOR acknowledges that employers presumably withheld Pennsylvania income tax from dependent care assistance benefits in tax year 2023. To prevent issues affected employees may encounter when filing their 2023 Pennsylvania state income tax returns, the DOR instructs employers take the following corrective steps:

• If 2023 Forms W-2 have already been filed with the DOR, file corrected 2023 PA Forms W-2 showing the reduction in taxable wages in Box 16 for dependent care assistance benefits up to $5,000 for the year. Give a copy of the corrected Form W-2 to affected employees.
• If 2023 Forms W-2 have not yet been filed with the DOR, file PA Forms W-2 with the DOR showing the reduction in taxable wages in Box 16 for dependent care assistance benefits up to $5,000 for the year. Give a copy of the corrected PA 2023 Form W-2 to affected employees.
• Do not show a reduction in Pennsylvania state income tax withheld on the 2023 Forms W-2 or the 2023 Form 1667, Annual Withholding Reconciliation Statement (REV-1667). Employees should report any over-withholding of state income tax on the Pennsylvania state income tax return and will receive any applicable refund from the DOR.

Ernst & Young LLP insights

Pennsylvania employers should confirm that they have adjusted their 2024 payroll system tax configurations to reflect that dependent care assistance benefits (including employee pretax contributions) up to $5,000 per year are excluded from Pennsylvania taxable wages subject to income tax withholding and are not included in Box 16 of the Pennsylvania Form W-2.