Under Act 34 of 2023 (HB 1300), amounts paid or incurred by an employer for dependent care assistance provided to an employee are now excluded from the employee’s Pennsylvania Personal Income Tax obligation, and therefore from Pennsylvania local earned income tax. This Pennsylvania law change, which went into effect on Dec. 14, 2023, but applied retroactively to Jan. 1, 2023, pertains to dependent care assistance programs under Title 26 of the Internal Revenue Code (26 U.S.C. § 129).
Due to the timing of this change, employers may have withheld tax on this type of assistance throughout the 2023 tax year.
This could create an issue when an employee who has received this benefit from an employer files their Pennsylvania local earned income tax return. Here are some steps to address this issue if you are affected:
Provide all affected employees with corrected W-2s with the dependent care benefits (up to $5,000) excluded from Pennsylvania Box 16 Taxable Wages.
Employers who neglect to correct their employees’ W-2s may be asked to provide supplemental information, on company letterhead, verifying the amounts listed on their employees’ local earned income tax returns.
Employers should stop withholding local earned income taxes for tax year 2024 on dependent care benefits (up to $5,000.)
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