Commonwealth v. Staley , Pa. Further, the Court has held that amounts reimbursed by an employer for ordinary, actual, reasonable, and necessary business expenses are excluded from compensation. Ritz v. Commonwealth , Pa. If parties to an employment contract recognize that the employee will pay for some business expenses out of his or her own pocket, these amounts may be excluded from income.
However, personal expenses, including daily living expenses of an employee, may not be excluded from compensation. Williamson v.
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Commonwealth , A. Under federal law prior to the Tax Cuts and Jobs Act of , employee expenses were accounted for on federal Form Not all expenses allowed for federal income tax purposes are allowable for Pennsylvania personal income tax purposes. Pennsylvania follows federal rules regarding accountable plans.
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Accordingly, if a plan is properly maintained under federal rules, reimbursed amounts are not included in Pennsylvania wages when the employee submits the expense to the employer for reimbursement and is reimbursed for the exact amount of those expenses. For Pennsylvania personal income tax purposes, allowable employee business expenses are similar to, but not the same as, expenses for federal purposes. Pennsylvania law only permits expenses required to perform the duties of a job or profession. An allowable Pennsylvania employee business expense must be all of the following:.
A taxpayer may deduct percent of the Pennsylvania-allowable unreimbursed employee business expenses unless a specific provision or limitation applies. Unlike federal rules and limitations for percentage and accounting of the expenses, Pennsylvania law contains no such provisions. Do not include such reimbursements in gross compensation. Note: Expenses may not be deducted based upon federal per-diem allowances. Only those expenses actually paid while performing the duties of employment may be deducted. Military personnel are not required to meet the distance test if the move is a permanent change of duty station.
If the taxpayer, spouse, and dependents are moving to the new duty station from different locations, all the allowable expenses may be claimed.
Expenses not properly listed under the Education Expense category will be denied by the department. Pennsylvania does not allow the following business expenses, even if allowed for federal purposes:. A taxpayer may use the working day or business volume method to determine their apportionable expenses for PA personal income tax purposes.
Part-year residents may only claim percent of unreimbursed business expenses if the expenses were incurred only while providing services in Pennsylvania or while a PA resident. Include a statement indicating the method used to determine the expenses for the period of residency. The excess of expenses over compensation for one employer or taxpayer may not be deducted from the compensation earned from another employer or taxpayer.
If an employer does not provide reimbursement, an employee may compensation by the allowable expenses actually incurred. If a reimbursement is more than the allowable expenses, the excess must be reported as taxable compensation on Line 1a of the PA, Personal Income Tax Return.
Pennsylvania generally does not recognize statutory employee income as business income if the income is reported on a W A statutory employee must report the income from a W-2 as compensation for PA personal income tax purposes and the business expenses must be included on PA Schedule UE. While most expenses are allowable for reporting purposes on PA Schedule UE, the business expenses included on a federal Schedule C must be examined to determine if there any nonallowable expenses for PA Schedule UE purposes.
For example dues to fraternal organizations or professional societies and dues and subscriptions expenses must be removed from the federal expenses. A breakdown of the expenses must be included by a separate statement showing the description and amount of the expenses or by including a separate PA Schedule C to report the expenses. All other information requested on Lines C though I and 1 through 5 in Part I is not required to be included.
Typically with statutory employees, income is reported to them via two methods or documents - a federal Form W-2 and a federal Form MISC. In some cases, a portion of the income not included on a W-2 is also not reported on a MISC when the income is below the required federal reporting threshold. However, such income is still required to be included by a taxpayer.
If the income and expenses for each are not determined using separate accounting, the expenses may be allocated based upon the percentage of the income for each method of income reported to the taxpayer to the total income. In such cases, all expenses included on a federal Schedule C must be allocated between the two reporting methods. If an expense is a nonallowable for PA Schedule UE purposes, it must still be allocated to that portion of the income.
However, the expense is not to be included with the total expenses for the income reported as compensation. The PA Schedule C reporting the income not reported as compensation and all its related expenses should have all the lines completed at the top of the schedule Lines A through I and 1 through 5. The main business activity would be included as the type of business, such as Insurance Sales.
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The department has determined that an advance or allowance for clothing is subject to tax unless it represents a reimbursement. The employee must report all reimbursements and allowances as compensation unless:. An allowance is considered taxable Pennsylvania income if the employee receiving the allowance can use it at his discretion.
An allowance for work clothing is included in Pennsylvania compensation, and, thus, taxed as income. However, a reimbursement paid to the employee for amounts he expended for a particular purpose is not income. Reimbursements for the purchase of work clothing are not income and costs in excess of the reimbursement are deductible to the employee. Compensation does not include benefits payable by an employer or labor union under a supplemental unemployment benefit plan, whether payable on a periodic basis or in the form of cash, services, or property. Refer to 61 Pa. Example 1.
An employee's use of the car is 75 percent business and 25 percent personal. The information listed below is required on Schedule UE. Only expenses for which records exist or can be obtained will be allowable for Pennsylvania personal income tax purposes. The department does not permit the use of estimates or federal per diem allowances when calculating expenses. The department has the legal authority to require evidence that the expenses claimed on a PA Schedule UE are allowable for Pennsylvania persona income tax purposes.
Keep all necessary documents, receipts, vouchers and other records for at least four years. Federal courts have held that there are no provisions in either Title VII of the Civil Rights Act of or the ADEA that provide compensatory damages for pain and suffering or for emotional distress. Burke, S. Schlieier, U. For Pennsylvania personal income tax purposes, damages for personal injury or sickness are excludable from Pennsylvania compensation.
This includes emotional distress as well as physical injury. If a claim was brought under either Title VII of the Civil Rights Act of or the ADEA, the amounts received are meant to restore the worker to the wage and employment position that the worker would have occupied prior to the unlawful discrimination. As mentioned above, damage awards received for personal injury or sickness are not taxable for Pennsylvania personal income tax.
This includes federal taxable punitive damages. Damage award for lost profits or lost capital are taxable for Pennsylvania personal income tax. Damage awards for lost profits are taxable under Pennsylvania personal income tax law.
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Damage awards for return of capital are taxable under Pennsylvania personal income tax law. For Pennsylvania personal income tax purposes, legal fees directly associated with the receipt of a damage award or settlement award are offset against the damage award received. The offset occurs only within the class of income. Taxable gross compensation is not limited to employee compensation.
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It also includes:. Honoraria are taxable for Pennsylvania personal income tax purposes. Executor fees are taxable as compensation. This includes executor's fees paid to nonresident executors and administrators for estates in Pennsylvania. An executor or executrix for an estate in Pennsylvania would be required to visit Pennsylvania to complete his or her duties. The fact that the executor or executrix may use an agent to do the duties does not take away the fact that they had a presence in Pennsylvania and are subject to tax on that income.
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The only apportionment to be done is to exclude that portion of the executor fee that represents the services performed outside of Pennsylvania for the convenience of the estate and by necessity out of Pennsylvania. An example would be an appearance in court outside of Pennsylvania involving the estate. The remainder of the fee would be taxable as compensation for Pennsylvania purposes by nonresident executors. Apportionment can only be done by the number of days required out of Pennsylvania over total days spent working on the estate, including the time of the agent.
Expert witness fees are taxable compensation for Pennsylvania personal income tax purposes.