Hiring your first employee in Pennsylvania means dealing with several different tax systems. You have federal and state taxes, plus two layers of local tax. Many business owners do not know about those local taxes until they see terms like “EIT” or “LST” on a paycheck.
The good news is that the process becomes much easier once you understand each part. However, missing even one step can lead to notices, penalties, or payroll problems later.
Here’s what Central Pennsylvania employers should know about payroll taxes for 2026.
Federal Payroll Taxes: FICA
Federal payroll taxes work the same way in Pennsylvania as they do across the country. FICA stands for the Federal Insurance Contributions Act. These taxes help fund Social Security and Medicare.
Employees pay 7.65% in FICA taxes. That includes 6.2% for Social Security and 1.45% for Medicare. Employers match both amounts.
As a result, the total FICA cost between the employer and employee is 15.3%.
The Social Security wage base is $184,500 for 2026. It increased from $176,100 in 2025. Once an employee earns more than that amount, Social Security withholding stops for the rest of the year.
Medicare works differently. There is no wage cap, so Medicare tax continues regardless of how much the employee earns.
High earners may also owe an extra 0.9% Medicare tax. Employers must begin withholding this tax after an employee earns more than $200,000 during the calendar year.
The employer does not match this extra 0.9%.
Pennsylvania’s Flat State Income Tax
Pennsylvania state income tax is much simpler than federal income tax.
The state withholding rate is a flat 3.07% on taxable compensation. Pennsylvania does not use several income tax brackets like the federal government.
That means the same state rate applies whether an employee earns $35,000 or $150,000.
Employers must register for a state withholding account before paying Pennsylvania wages. Registration and filing are handled through myPATH, the Pennsylvania Department of Revenue’s online system.
Pennsylvania Unemployment Compensation
Pennsylvania Unemployment Compensation, or UC, works differently from payroll taxes in many other states.
New non-construction employers generally pay a 3.822% UC contribution rate. New construction employers have a higher rate of 10.5924%.
The employer tax applies to the first $10,000 of wages paid to each employee during the year.
After a business is no longer considered a new employer, Pennsylvania assigns an experience-based rate. That rate can change based on factors such as the employer’s unemployment claims history.
Employees Also Pay a Small UC Contribution
Pennsylvania also requires employees to contribute toward unemployment compensation.
The employee UC withholding rate is 0.07% for 2026. Unlike the employer portion, this withholding applies to gross wages without the $10,000 wage limit.
That works out to about 70 cents for every $1,000 in gross wages.
Although the amount is small, it is still a required payroll deduction. Therefore, employers should make sure their payroll system is withholding it correctly.
Local Earned Income Tax and Act 32
Local Earned Income Tax, commonly called EIT, is one of the more confusing parts of Pennsylvania payroll.
Municipalities and school districts can charge local income taxes. Rates vary depending on where an employee lives and works.
Employers cannot simply use one local tax rate for every employee.
Instead, Pennsylvania generally requires employers to compare two rates. These are the employee’s resident EIT rate and the nonresident EIT rate for the employee’s work location.
The employer must withhold the higher of those two rates.
Because of this rule, two employees working in the same office may have different local withholding rates.
Using PSD Codes to Find the Correct Rate
Each new employee should complete a Residency Certification Form, also known as Form CLGS-32-6.
The form identifies the employee’s home municipality and work location. It also uses six-digit Political Subdivision, or PSD, codes.
Employers can use Pennsylvania’s online municipal statistics system to find PSD codes and local tax rates.
The employer then sends the withheld EIT to the tax collector responsible for the work location.
Philadelphia Uses a Different System
Philadelphia does not use the standard Act 32 withholding system.
Employers with workers who live or work in Philadelphia may need to withhold the Philadelphia Wage Tax instead.
As of July 1, 2026, the rates are 3.735% for Philadelphia residents and 3.425% for nonresidents.
The Local Services Tax
The Local Services Tax, or LST, is separate from the Earned Income Tax.
Instead of being based on a percentage of wages, the LST is usually a flat annual amount. It is based on where the employee works.
The maximum combined LST is generally $52 per year.
When the annual tax is more than $10, employers normally divide the tax across the employee’s pay periods. For example, the employer would not usually deduct the entire $52 from one paycheck.
Low-Income LST Exemptions
Municipalities that charge more than $10 in LST must provide a low-income exemption.
The exemption generally applies when the employee expects to earn less than $12,000 from all sources within that municipality during the year.
However, the exemption is not automatic.
The employee must give the employer an LST exemption certificate. Once the employer receives the form, LST withholding should stop as long as the employee remains eligible.
If the employee later earns more than the applicable limit, withholding may need to restart.
Employees With More Than One Job
Special rules also apply when someone works more than one job.
An employee should not simply pay the full Local Services Tax at every workplace. Pennsylvania uses primary-employment rules to determine which employer should collect the tax.
Employees who qualify for an exemption should provide the required documentation to the appropriate employer.
New Hire Reporting and Other First-Payroll Steps
Payroll taxes are only part of hiring an employee. Employers also have several reporting and compliance steps to complete.
- Report new hires to Pennsylvania. Employers generally must report employees who live or work in Pennsylvania within 20 days of hiring them. This includes many part-time, seasonal, and rehired workers.
- Complete Form I-9. Employers must complete the federal employment eligibility process within the required time after an employee begins work.
- Activate your Pennsylvania UC account. Your unemployment compensation account is handled through the Pennsylvania Department of Labor & Industry. It is separate from your state withholding account.
- Check minimum wage requirements. Pennsylvania’s general minimum wage remains $7.25 per hour in 2026, although different federal or industry rules may apply in some situations.
Frequently Asked Questions
Do Pennsylvania employees really pay part of the unemployment tax?
Yes. Pennsylvania requires an employee unemployment contribution.
For 2026, the rate is 0.07% of gross wages. Employers must withhold this amount from employee paychecks in addition to paying their own UC contribution.
What is the “higher of” rule for local EIT withholding?
Pennsylvania employers compare two local tax rates.
The first is the employee’s resident EIT rate. The second is the nonresident rate for the employee’s work location.
The employer generally withholds whichever rate is higher.
Is the Local Services Tax the same as local income tax?
No. They are separate taxes.
Earned Income Tax is based on a percentage of taxable earnings. The Local Services Tax is generally a flat annual amount based on where the employee works.
What happens if I forget to report a new hire?
Late or missing reports can create compliance problems and may lead to penalties.
The easiest way to prevent this is to make new hire reporting part of your standard onboarding process. Add it to the same checklist you use for payroll forms and employment documents.
Do I need separate Pennsylvania tax accounts?
Yes.
Pennsylvania income tax withholding is handled through the Department of Revenue and myPATH. Unemployment Compensation is handled separately through the Department of Labor & Industry.
Registering with one agency does not automatically complete your registration with the other.
Why Payroll Setup Matters
Payroll mistakes do not always become obvious right away.
A small setup error can continue through several pay periods before anyone notices. Months later, the business may receive a tax notice or discover a problem during year-end reporting.
Employees may also notice that their local taxes were withheld incorrectly.
Pennsylvania payroll can be especially challenging because federal, state, unemployment, and local taxes all work differently. Setting everything up correctly from the beginning can prevent much larger problems later.
We help employers throughout Carlisle, Mechanicsburg, and the surrounding Central Pennsylvania area with payroll setup and ongoing compliance.
If you’re setting up payroll for the first time, or simply want someone to review your current system, schedule a call with our team.
