Taxes must be withheld on “compensation” paid for services. Compensation includes any remuneration whether paid in cash or another medium, wages, salaries, commissions, certain sick pay, termination pay, and similar types of payments. Pennsylvania's withholding requirements are similar to those under federal law, but with some major differences. Pennsylvania does not automatically recognize changes to the federal Internal Revenue Code. Thus, new federal exemptions from income do not apply unless specifically enacted into state law.
Exclusions. Payments that are not subject to Pennsylvania income tax include:
• Employee contributions to an Internal Revenue Code Section 125 plan for coverage for hospitalization, sickness, disability or death, supplemental unemployment benefits, or strike benefits.
• Sick pay and sick leave not representing regular wages, including payments made by third-party insurers for sickness or disability.
• Pension or retirement pay.
• Meals and lodging provided to an employee by the employer.
• Personal use of employer-owned or leased property and/or services, at no cost or at a reduced cost.