Payroll taxes that employers pay in Pennsylvania break into three layers: federal Social Security, Medicare, and unemployment taxes; state unemployment contributions and a 3.07% personal income tax withholding; and local earned income and services taxes that vary by where each employee lives and works. Together these add roughly 10–15% on top of every dollar of wages, depending on your unemployment experience rating and the local rates that apply to your workforce.
Federal Taxes Every Employer Owes
Before any Pennsylvania-specific rule applies, you owe the federal payroll taxes administered by the IRS. Under the Federal Insurance Contributions Act, you pay 6.2% of each employee’s wages for Social Security and 1.45% for Medicare, and you withhold the same amounts from the employee.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates Social Security applies only to the first $184,500 of wages in 2026; Medicare has no cap.2Social Security Administration. Contribution and Benefit Base
Once an employee crosses $200,000 in a calendar year, you must withhold an additional 0.9% Medicare tax from their pay. There is no employer match on that extra 0.9%, but you are still responsible for withholding and remitting it.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
The Federal Unemployment Tax Act adds 6.0% on the first $7,000 of each employee’s annual wages. Because Pennsylvania runs an active unemployment program, most employers receive a 5.4% credit, dropping the effective FUTA rate to 0.6%.3Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return Confirm your credit status each year, since an outstanding state unemployment loan to the federal government can reduce it.
Pennsylvania Unemployment Compensation Contributions
Pennsylvania funds its unemployment system from both sides of the paycheck. Employees contribute a flat 0.07% of gross wages for 2026, which you withhold and remit; the employer share is far larger.4Commonwealth of Pennsylvania. Calculating Contributions, Penalties and Interest
New employers without an experience record pay a fixed starting rate. For 2026, that rate is 3.822% for non-construction businesses and 10.5924% for construction firms, with surcharges already built in.5Commonwealth of Pennsylvania. Eligibility Criteria for 2026 Experience-Based Contribution Rate As the business matures, the state assigns an experience-based rate reflecting how many former employees have drawn benefits, calculated from your reserve ratio and benefit ratio.
That basic rate is not the final number. For 2026, a 9.2% surcharge multiplies the basic rate (so a 5.0% basic rate becomes 5.46%), and a 0.60% additional contributions charge is added to every employer’s rate. The 2026 interest factor is zero.6Department of Labor and Industry. UC Computation of Rates
All of these contributions, employer and employee alike, apply only to the first $10,000 of each employee’s wages per calendar year. Earnings above that threshold incur no further UC tax.7Commonwealth of Pennsylvania. Yearly Tax Highlights
Pennsylvania Personal Income Tax Withholding
Pennsylvania levies a flat 3.07% personal income tax on compensation. The tax belongs to the employee, but the legal duty to withhold and remit sits with you.8Commonwealth of Pennsylvania. Employer Withholding It covers wages, salaries, bonuses, commissions, and most other forms of compensation earned in the state.
Treat the withheld amount as a trust fund. If you fail to collect or remit the 3.07%, any officer, director, partner, or other responsible person with a duty to handle the money can be held personally liable for the full amount plus penalties and interest, even when the business is a corporation or LLC.9Department of Revenue. Income Subject to Tax Withholding – Penalties, Interest and Other Additions Willful failure can draw criminal prosecution on top of the civil exposure.
When Reciprocal States Change the Answer
Pennsylvania has reciprocal personal income tax agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia.10Commonwealth of Pennsylvania. Determining Residency for PA Personal Income Tax Purposes If an employee lives in one of those states and works in Pennsylvania and notifies you of their residency, you generally do not withhold the 3.07%; you withhold for their home state instead. The reverse also applies for Pennsylvania residents working across the border. The agreements cover standard W-2 compensation and do not extend to independent contractor payments or certain ownership-based compensation.
Local Earned Income Tax and Local Services Tax
On top of state taxes, Pennsylvania employers manage two local payroll taxes. Act 32 centralized collection, but rates and amounts still vary by municipality and school district.11PA Department of Community and Economic Development. Local Income Tax Information
Earned Income Tax (EIT)
The local Earned Income Tax is a percentage of compensation shared by the municipality and school district. You identify each employee’s home and work locations through six-digit Political Subdivision Codes and then withhold the higher of the resident rate where the employee lives or the non-resident rate where they work.12PA Department of Community and Economic Development. FAQ – Act 32, Earned Income Tax Collection Reform If the resident rate is 1.6% and the non-resident rate at the workplace is 1.3%, you withhold 1.6%. PSD codes and current rates are published by the Department of Community and Economic Development.
Local Services Tax (LST)
The Local Services Tax is a flat annual charge on anyone working within a taxing jurisdiction. State law caps the combined total at $52 per employee per calendar year, regardless of how many municipalities the person works in.13Pennsylvania General Assembly. Local Tax Enabling Act Some jurisdictions set it lower, and school district portions vary. You typically withhold the LST in small increments each pay period. Employees earning less than $12,000 per year from sources within the taxing jurisdiction are generally exempt.14PA Department of Community and Economic Development. Local Services Tax (LST)
Philadelphia Wage Tax
Philadelphia sits outside Act 32 and runs its own wage tax. If you have employees who live or work in the city, you must register with Philadelphia and withhold its wage tax. As of July 1, 2025, the rate is 3.74% for residents and 3.43% for non-residents who work in the city.15City of Philadelphia. Wage Tax (Employers) The city has scheduled gradual rate decreases, so check the current schedule before each fiscal year adjustment.
Workers’ Compensation Insurance
Workers’ compensation is not technically a payroll tax, but it is a mandatory payroll-based cost for virtually every Pennsylvania employer. If you have even one employee who could be injured on the job in Pennsylvania, you must carry coverage.16Commonwealth of Pennsylvania. PA Workers’ Compensation Employer Information Premiums run as a rate per $100 of payroll and swing dramatically by industry classification. You can buy from a private insurer, use the State Workers’ Insurance Fund, or qualify as self-insured.
One related classification point. All of the taxes above apply only to employees, not independent contractors. Pennsylvania presumes anyone performing services for pay is an employee unless the worker is both free from your control and customarily engaged in an independent business, with a written contract additionally required for construction work under Act 72. Getting that call wrong exposes you to penalties of $750 per misclassified worker and civil penalties up to $1,000 for a first Act 72 offense and $2,500 for later violations.17Department of Labor and Industry. Misclassified Workers
Registering and Setting Your Filing Schedule
You cannot legally run payroll in Pennsylvania without active state tax accounts. Register through the Pennsylvania Enterprise Registration Form (PA-100) on the myPATH portal, selecting at minimum Employer Withholding Tax and Unemployment Compensation. You will need your Federal Employer Identification Number, your business’s legal name and structure, and the physical address of your primary location.18Commonwealth of Pennsylvania. myPATH
The state assigns your withholding filing frequency based on quarterly volume:8Commonwealth of Pennsylvania. Employer Withholding
- Quarterly if total withholding is under $300 per quarter, due by the last day of the month following the quarter.
- Monthly if withholding runs $300 to $999 per quarter, due by the 15th of the following month.
- Semi-monthly if withholding runs $1,000 to $4,999.99 per quarter, due within three banking days after the close of each semi-monthly period.
- Semi-weekly if withholding is $5,000 or more per quarter (or $20,000 or more annually), due Wednesday for Wednesday-through-Friday paydays and Friday for Saturday-through-Tuesday paydays.
Withholding returns and payments go through myPATH. Unemployment compensation filings use the separate Unemployment Compensation Management System with its own credentials.18Commonwealth of Pennsylvania. myPATH If a required withholding payment is $1,000 or more, you must pay electronically; failing to do so triggers a 3% penalty of the amount due, up to $500 per occurrence.9Department of Revenue. Income Subject to Tax Withholding – Penalties, Interest and Other Additions
What Missing a Deadline Costs
Penalties on state income tax withholding escalate quickly:9Department of Revenue. Income Subject to Tax Withholding – Penalties, Interest and Other Additions
- Late payment: 5% of the underpayment per month or partial month, capped at 50%.
- Failure to file a quarterly return: 5% per month of the underpayment, capped at 25%.
- Fraud: an additional 50% of the underpayment.
- Interest: simple interest accrues daily from the due date at a rate the Department of Revenue announces each year.
Combined with the personal trust-fund liability on withheld income tax, these penalties mean the cost of a payroll mistake lands on individuals, not just the business.