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PA Law Change May Impact PIT Obligations Related to Dependent Care Assistance

Under Act 34 of 2023 (HB 1300), amounts paid or incurred by an employer for dependent care assistance provided to an employee under an IRC § 129 dependent care assistance program is not included in the employee’s taxable compensation for Pennsylvania Personal Income Tax purposes. This PA law change, which went into effect on Dec. 14, 2023, pertains to dependent care assistance programs under Title 26 of the Internal Revenue Code (26 U.S.C. § 129). ​The types of dependent care assistance covered by the new law include:

(a) the fair market value of benefits provided in kind by the employer, (b) an amount paid directly to a daycare facility by the employer or reimbursed to the employee to subsidize the benefit, or (c) benefits from the pre-tax contributions made by the employee under a section 125 dependent care flexible spending account.​

Due to the timing of this change, employers have presumably been withholding tax on this type of assistance throughout the 2023 tax year.

This could create an issue when an employee who has received this benefit from an employer files their PA Personal Income Tax Return (PA-40). Here are some steps to address this issue if you are affected:

Employers:

  1. If you have already filed your W-2s with the Department of Revenue, file a corrected W-2 with the dependent care benefits (up to $5,000) excluded. Provide an updated W-2 to the employee to alert them of the change.
  2. If you have not filed W-2s with the Department of Revenue, you can file updated W-2s in which the dependent care benefits reported in box 10 are not included in box 16, State Wages. If you make this adjustment, it should not exceed $5,000 for tax year 2023.
  3. Important: Do not file amended W-3s and Annual Withholding Reconciliation Statements (REV-1667s) removing the withholding previously made on dependent care benefits. Only amend the W-2 compensation. Employees will report any over withholding on their PA-40 and can obtain a refund, if applicable.
  4. Future: Stop withholding for tax year 2024 on dependent care benefits (up to $5,000).

Employees:

  1. ​​If you have received a W-2 that does not account for the update to Pennsylvania law pertaining to dependent care assistance programs, ask your employer to issue a corrected W-2 before you move forward with the filing of your PA-40. This will help you avoid any issues with the processing of your PA return and any state refund that you are requesting.
  2. If your employer has already issued your W-2 without accounting for the update in Pennsylvania law pertaining to dependent care assistance programs, you can file the PA-40 with the corrected W-2 amounts.
    1. In this case, decrease your box 16 wages by the dependent care benefits (up to $5,000), and use the amount for line 1a of the PA-40.
    2. Include the W-2 along with a written statement from your employer to verify why the amounts on the W-2 do not match the amount reported on line 1a.​
    3. Example: If your dependent care benefits are $5,000, this should lower your PA tax liability by $154.
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