Income Items Taxable as Pennsylvania Compensation Based on Facts and Circumstances

Type of Compensation Taxable Description Non–Taxable Description Sick pay, sick leave Sick pay and sick leave are taxable compensation when representing regular wages. The employer must include them as compensation and withhold Pennsylvania tax. Request REV–634, Employee Fringe Benefits and Wage/Salary Supplements . Payments, not representing regular wages, including payments made by third party insurers for sickness or disability, are not taxable income for Pennsylvania purposes. Your employer should not include periodic payments for sickness or disability in Box 16 of your federal FormW–2. If your employer includes this income and withholds Pennsylvania tax, you must obtain and submit a corrected federal FormW–2 or a statement from your employer explaining the error. Disability benefit payments, including payments made by third party insurers for sickness or disability Taxable if paid by employer. Nontaxable if paid by third-party insurer. A premature withdrawal from a regular IRA or Roth IRA A premature withdrawal from a regular IRA or Roth IRA is taxable compensation to the extent that the taxpayer receives an amount that exceeds his or her previously taxed contributions. The cost-recovery method of accounting must be used to determine the taxable portion unless timely rolled over into an eligible Pennsylvania retirement plan. Please consult your summary plan description or plan administrator. Payments received under worker’s compensation acts, occupational disease acts, or similar legislation, including payments for injuries you received while working, and damages received, whether by suit or otherwise, for personal injuries (unless one is required to pay these monies back to the employer and receives regular salary in return) Taxable when the employee must turn over the worker’s compensation payments to the employer in order to receive his or her regular salary in return. The employee does not report the worker’s compensation payments, but does report the full amount of his or her regular salary. All other payments received under workers compensation acts is not taxable compensation. Occupational disease acts are not taxable. Scholarships or fellowships and stipends The recipient is required to apply the skill and training to advance research, creative work or some other project or activity. Made on the basis of need or academic achievement, is not taxable if awarded to encourage or allow the recipient to further his or her academic achievement is not taxable compensation. Employer-provided fringe benefits Non-excludible fringes Excludible fringes (e.g. personal use of an employer’s owned or leased property and/or services, at no cost or at a reduced cost, and using your employer’s dependent care facilities) is not taxable compensation. Damage awards - Delayed damages received in connection with a court judgment or settlement Delay damages received in connection with a court judgment or settlement is taxable compensation. Refer to Damage Awards Federal-taxable punitive damages awarded and settlements from personal injury Federal-taxable punitive damages received for personal physical injury or physical sickness, whether received by suit or by settlement is not taxable compensation. Damages, awards, and settlements from personal injury or sickness Damage awards and settlements from personal injury or sickness if pain and suffering, emotional distress, or another non-economic element was or would have been a significant evidentiary factor in determining the amount of the taxpayer’s damages is not taxable compensation. Refer to Damage Awards . All other damage awards Other damage awards that are also taxable e.g. damage awards and settlements to the extent that the payments represent back wages or other uncollected entitlement to Pennsylvania-taxable incomes, damage awards for lost profits, etc.) is taxable compensation. Awards Awards given in recognition for past or future service are taxable compensation. All awards not given in recognition for past or future service are not taxable compensation. Gifts Taxable if gift is a transfer of cash or property in payment for past or present services or as an inducement to perform future services. Gifts made from detached or disinterested generosity is not taxable compensation. Tuition assistance or educational benefits unless the training or education is either: Required by law or regulation; or Required of the employee by the employer in order for the employee to retain the skills necessary for his or her present position. If the course, degree program, or training is designed to enable the employee to enter a new field or profession or to obtain a promotion, the reimbursement is taxable. If employer reimburses employees for education cost, then the reimbursement is fully taxable and the employee may deduct only those amounts directly related to business expenses allowed on PA-40 Schedule UE, Allowable Employee Business Expenses, to determine taxable compensation. Employees of an institution of higher learning that receive free or low–cost education receive the tuition assistance tax free for PA PIT purposes unless they receive cash grants (for themselves or their children) as reimbursements for the tuition paid at their institution of employment or any other institution of higher learning. Since PA PIT has no distinction regarding taxability with respect to the amount of the benefits received for highly compensated employees, these benefits would also be considered tax free for PA PIT purposes unless a cash grant is received. Employee contributions to non-qualifying deferred compensation plans Refer to PA PIT Bulletin 2005–03 - Deferred Compensation Under Nonqualified Plans [PDF] . Refer to PA PIT Bulletin 2005–03 - Deferred Compensation Under Nonqualified Plans [PDF] . Distributions from eligible Pennsylvania retirement plans and non-qualifying deferred compensation plans Refer to PA PIT Bulletin 2005–03 - Deferred Compensation Under Nonqualified Plans [PDF] and PA PIT Bulletin 2005-05 - Qualified Employer Plans [PDF] . Act 2005–40 established the general rule that distributions from plans described in IRC §409A(d)(1) attributable to an elective deferral of income or the income on any elective deferral of income are taxable. Contributions previously taxed using the cost recovery method are not taxable. Federal or state active-duty pay inside Pennsylvania for armed forces personnel If related to active duty at a base located in Pennsylvania by Pennsylvania resident military personnel or for non-emergency active-duty pay by Pennsylvania National Guard reservists Active duty pay for nonresident taxpayers Emergency active-duty pay under 35 Pa. C.S. §§ 7601-7604. Federal active duty pay for commissioned corps of the U.S. Public Health Service or the National Oceanic and Atmospheric Administration Pennsylvania resident taxpayers are subject to tax on their active duty pay regardless of where earned Active duty pay for nonresident taxpayers