The Local Services Tax (LST): What Every Business Needs to Know

Oct 7

The connection between your business and the community where it operates is fundamental. The roads your employees drive on, the police who keep your property safe, and the emergency services that provide peace of mind are all part of that relationship. The local services tax is a direct link to supporting that infrastructure. While it may feel like just another administrative task, understanding its purpose can make the process more meaningful. As an employer, you play a critical role in collecting these funds. Let’s explore the mechanics of the LST, from your responsibilities to your employees’ rights, so you can manage this tax efficiently and appreciate its impact on your local community.

Key Takeaways

Master the LST Withholding and Remittance Cycle: Your core responsibility is to accurately withhold a prorated amount from each paycheck, send the collected funds to the correct tax authority quarterly, and maintain organized records of all payments and employee exemption forms.
Pinpoint the Correct Work Location for Each Employee: The LST is based on where work is physically performed, not your company's headquarters. For remote staff, their home is their worksite, so you must track each employee's location to ensure you're withholding for the correct municipality.
Process Exemptions Based on Employee Paperwork: You are not responsible for verifying an employee's eligibility for low-income or military exemptions. Your duty is to process the official forms they provide and stop withholding accordingly, as the responsibility for accuracy rests with the employee.

What Is the Local Services Tax?

If you’re a business owner in Pennsylvania, you’ve likely come across the Local Services Tax, or LST. Think of it as a flat-rate tax levied on individuals for the privilege of working within a specific municipality. It’s not an income tax based on how much someone earns, but rather a fee for being employed in that location. This tax replaced the old Emergency and Municipal Service Tax (EMST) and is a key part of local funding.

As an employer, you're responsible for withholding this tax from your employees' paychecks. Understanding how it works is crucial for staying compliant and managing your payroll correctly. It might seem like just another line item, but knowing the purpose, mechanics, and rules behind the LST can save you a lot of headaches down the road. Let’s break down exactly what this tax is all about.

Why Does LST Exist?

The Local Services Tax isn't just a random fee; it directly funds the essential services that keep your community running smoothly. The money collected from the LST helps pay for critical public services like police and fire departments, emergency medical services, and road maintenance. Essentially, it’s a way for everyone who works in a municipality—and benefits from its services—to contribute to the local infrastructure and safety net. By funding these services, the LST helps ensure that when you or your employees need help, the resources are there.

How Does LST Work?

The process is fairly straightforward. If your business is located in a municipality that imposes the LST, you are required to withhold the tax from your employees' pay. The total amount is capped at $52 per person per year, no matter how many jobs they hold. This means if an employee works for you and has a second job in another town with LST, their total annual contribution across all jobs cannot exceed $52. You can find out if your business location is subject to the tax by checking the Official Tax Register. The tax is typically collected on a prorated basis with each paycheck.

How LST Differs from Other Local Taxes

It’s easy to get local taxes confused, but the LST is unique. Unlike an income tax, it’s not based on a percentage of earnings. And it’s different from a Per Capita Tax, which is levied on residents just for living in an area. The LST is specifically a tax on the privilege of working in a particular jurisdiction. This is an important distinction because it applies to anyone employed within the municipality’s borders, whether they live there or commute from another town. This focus on the place of employment is what sets the Local Services Tax apart from other local tax obligations.

Who Pays the Local Services Tax?

The Local Services Tax is paid by the employee, but as the employer, you're responsible for withholding it. This makes understanding who owes the tax—and where—a critical part of your payroll process. The rules can seem a bit tricky, especially with multiple job sites or remote work in the mix. Let's break down exactly who is subject to the LST so you can handle your withholding obligations with confidence and keep your business compliant.

Which Employees Are Subject to LST?

The Local Services Tax applies to anyone employed within a municipality that has enacted the tax. According to tax administrator Berkheimer, the LST is a local tax that individuals must pay if they work in an area that imposes it. This isn't limited to full-time staff; it covers anyone "engaged in any form of employment within the jurisdiction." So, whether your team members are salaried, hourly, part-time, or seasonal, if their work is performed in a location with an LST, they are generally required to pay it. This broad definition ensures that anyone benefiting from local services through their employment contributes to their funding.

Where Does LST Apply?

The key to understanding LST is that it’s tied to the physical location of employment. Think of it as a tax on the privilege of working in a specific municipality. It’s not based on where your company headquarters is located or where your employee lives. This is an important distinction from other local taxes you might encounter, like a Per Capita Tax. The LST is specifically linked to the workplace. If your business has multiple locations in different municipalities, you’ll need to track where each employee performs their work to determine their LST obligations. This statutory authorization makes the employee's work site the deciding factor.

Handling LST for Employees with Multiple Jobs

Things can get complicated when an employee works for more than one employer. So, which municipality gets the LST? The rule of thumb is that the tax is paid to the municipality of their primary employment. If an employee has two jobs, the LST should be withheld by the employer they earn the most from. If there isn't a clear primary job, the tax is typically paid to the municipality where the employee both lives and works. If that doesn't apply, it defaults to the workplace that is geographically closest to their home. As an employer, it's helpful to have a process for employees to declare their primary employer to avoid incorrect withholding.

What About Remote Workers?

With the rise of remote work, figuring out LST obligations has become a common challenge. The rule is straightforward: remote workers pay LST to the municipality where they physically perform their work. This means if your employee works from their home office, their home municipality is the one that matters for LST—not the location of your company's main office or where you process payroll. This is a critical detail for businesses with distributed teams. You must withhold and remit the LST based on each remote employee's actual work location, which requires accurate record-keeping of their home addresses as their designated worksites.

LST Exemptions and Rates: What You Need to Know

Not every employee will be subject to the LST, and the rate isn't the same across the board. Understanding who is exempt and how rates are determined is crucial for keeping your payroll accurate and compliant. The rules are fairly specific, but once you know them, they’re easy to follow. Let's walk through the key exemptions and the factors that influence LST rates so you can handle this tax with confidence.

Low-Income Exemptions

One of the most common exemptions is for low-income earners. The state sets a clear threshold: if an employee earns less than $12,000 annually, they may be exempt. Here’s how it works: if your local LST is more than $10, you must excuse employees earning under this amount. If the tax is $10 or less, your municipality can choose whether to offer the exemption. An employee must submit an exemption form each year to qualify. As the employer, you’ll stop withholding the tax until they cross the $12,000 threshold, at which point you must resume deductions.

Exemptions for Military Service

The LST also includes exemptions for military personnel to honor their service. This applies to members of the reserves who are called to active duty during the year. Disabled veterans are also excused from paying the tax. These exemptions recognize the unique financial and personal circumstances of those serving in the armed forces. It’s important to have a process in place to handle these exemptions correctly and respectfully when an employee provides the necessary documentation. You can find the official guidelines on the Pennsylvania Department of Community and Economic Development's Local Services Tax page.

How Tax Rates Are Set

The LST rate your business withholds is determined by the local government where your business is located. These rates can, and sometimes do, change from year to year. Any new tax or rate change typically takes effect on January 1st. To ensure businesses have time to prepare, municipalities are required to notify the state of any changes by December 1st of the preceding year. This gives you a heads-up to adjust your payroll systems before the new year begins, preventing any compliance hiccups or incorrect withholdings for your team.

Why Rates Differ Between Municipalities

You might notice that the LST in one town is different from the next. This variation comes down to local priorities and budgets. State law requires municipalities to dedicate at least 25% of the LST revenue they collect to emergency services, like police, fire, and ambulance crews. Beyond that, local governments have some flexibility. Some may use the remaining funds to provide property tax relief for homeowners through programs like the homestead exclusion, while others might invest it in other community services. These local decisions directly influence the final tax rate.

Your Responsibilities as an Employer

As a business owner, managing payroll taxes is a core part of your financial responsibilities, and the Local Services Tax is no exception. Staying on top of your LST obligations is key to keeping your business compliant and running smoothly. Think of it as a four-part process: withholding the correct amount from employee paychecks, remitting those funds to the right tax authority on time, keeping accurate records, and handling employee exemption requests properly.

Getting this right from the start saves you from future headaches like penalties and interest. Your primary role is to act as the collection agent for the local municipality. This means you need to know which of your employees are subject to the tax, how much to withhold, and when and where to send the payments. It also involves a bit of administrative work, like processing exemption forms for low-income employees. While it might seem like another item on your long to-do list, establishing a clear system for LST makes the process straightforward. We’ll walk through exactly what you need to do to handle LST with confidence.

How to Withhold LST Correctly

Your first step is to determine if your business is located in a municipality that levies the LST. You can confirm this by checking Pennsylvania's Official Tax Register, which lists all local taxes by jurisdiction. If your work location is on the list, you are required to withhold the LST from your employees' pay.

For taxes greater than $10, the total annual amount should be withheld in equal, smaller amounts from each paycheck throughout the year. For example, if the annual LST is $52, you would withhold $1 per week for an employee paid weekly. This prorated approach prevents a large, one-time deduction from an employee's pay and ensures a steady collection process for the municipality.

Keeping the Right Records

Good record-keeping is your best friend when it comes to tax compliance. For the LST, you’ll need to maintain clear records of the amounts withheld from each employee’s paycheck. You should also keep any employee-submitted exemption certificates on file.

The good news is that you aren't expected to be a detective. According to the Pennsylvania Department of Community and Economic Development, employers are generally not responsible for verifying the validity of an employee's exemption claim. Your duty is simply to stop withholding the tax when you receive a valid exemption form and restart it if their circumstances change. Keeping these forms organized and accessible will make your life much easier if you ever need to justify your actions.

Reporting and Remitting LST Payments

After withholding the LST from your employees' pay, you need to send the collected funds to the designated tax collector for your municipality. These payments are typically made on a quarterly basis. Along with the payment, you will need to submit a corresponding report that details the withholdings for each employee during that period.

It’s crucial to meet the filing deadlines set by your local tax authority to avoid late fees and penalties. Each jurisdiction may have its own specific forms and procedures, so be sure to get the correct instructions from your local tax office. Setting calendar reminders for these deadlines can help ensure you never miss a payment and keep your business in good standing.

Processing Employee Exemption Forms

Some of your employees may be exempt from the LST, most commonly due to earning less than $12,000 annually. To claim this exemption, an employee must provide you with a completed LST Exemption Certificate at the beginning of the year or when they are hired.

Once you receive this form, your responsibility is to stop withholding the LST from that employee's paychecks immediately. You should keep a copy of the signed certificate in the employee's file as proof of their exemption status. It’s a straightforward process: the employee provides the form, and you adjust their payroll accordingly. Make sure your employees know this option is available to them and where they can find the necessary paperwork.

Avoiding Penalties for Non-Compliance

Staying compliant with LST rules is all about being proactive. A key part of this is knowing when to restart withholding for an employee who was previously exempt. You must begin withholding the tax again if an employee’s earnings surpass the $12,000 income threshold.

You also need to act if you receive a directive from the local government to restart withholding or if an employee informs you they no longer qualify for the exemption. Regularly reviewing payroll and maintaining open communication with your employees can help you catch these changes early. By staying on top of these details, you can protect your business from the financial strain of penalties and interest charges that come with non-compliance.

What Your Employees Need to Know

You handle the LST withholding, but your employees have responsibilities, too. Communicating clearly about their role can prevent a lot of confusion and ensure everyone is on the same page. It helps them understand their rights regarding exemptions and refunds, which makes the process smoother for your payroll team and gives your employees peace of mind. Here’s a breakdown of what your team needs to know about the Local Services Tax, which you can share to answer their most common questions.

How Employees Can File for an Exemption

If an employee expects to earn less than $12,000 in a calendar year from all sources within a municipality, they can file for a low-income exemption. To do this, they need to complete an official LST Exemption Certificate and give it to you. This isn't a one-time task; they must submit a new form each year to maintain their exempt status. Once you receive the completed form, you must stop withholding the LST from their paychecks for the rest of the year. It’s a straightforward process that allows employees to avoid having the tax deducted if they know their income will fall below the threshold. You can find more details about the Local Services Tax on Pennsylvania's official website.

Clarifying Rules for Multiple Workplaces

Employees who juggle multiple jobs often wonder how the LST applies to them. The rule is designed to prevent them from being taxed more than once. The tax is owed to the municipality of their primary place of employment. If they don't have a clear primary job, the tax is paid to the municipality where they both live and work. If that doesn't apply, it defaults to the workplace located closest to their home. This hierarchy ensures fairness and predictability. For a more detailed breakdown, tax administrators offer a helpful statutory authorization explanation that clarifies these priority rules.

Necessary Documents for Employees

It's important for employees to understand that they are fully responsible for the accuracy of their exemption forms. Your role as the employer is simply to process the paperwork they provide. You are not required to verify their income or confirm their eligibility for an exemption. Your obligation is to stop withholding the tax when you receive a valid form and restart it if they revoke the exemption or at the start of a new year. This puts the ownership on the employee to ensure their documents are correct and submitted on time, protecting both them and your business from compliance issues.

The Employee Refund Process

What happens if an employee pays LST but ends up earning less than the exemption threshold by the end of the year? They are entitled to a refund. For example, if someone pays the tax for a few months and then leaves the job, their total annual income might fall below $12,000. Each local tax authority is required to have a process for employees to file for a refund of any overpaid LST. The only exception is for very small amounts; municipalities are not required to issue refunds of $1 or less. Employees should contact the local tax collector directly to get the necessary forms and start the refund process.

How to Manage LST in Multiple Locations

If your business has multiple locations or employees who travel between sites, figuring out LST can feel like a puzzle. It’s not just about if you pay, but where you pay. When your team is spread across different municipalities, each with its own rules, it’s easy to feel overwhelmed. But with a clear understanding of the process, you can manage these obligations smoothly and confidently. Getting this right is key to staying compliant and avoiding headaches down the road. Let's walk through how to handle LST when your team is spread out.

When Employees Work in Different Municipalities

This is a common scenario for many businesses. If an employee splits their time between offices in different towns, where does the LST go? The rule of thumb is that the tax is paid to the municipality of their primary job location. If there isn't a clear "main" office, the next step is to look at where they live and work. If that doesn't apply, the tax goes to the workplace closest to their home. This hierarchy creates a clear path for determining your obligation, as detailed in the statutory authorization explanation for the tax.

Coordinating with Different Tax Authorities

As an employer, your first step is to confirm which of your business locations fall within a municipality that levies the LST. You can do this by checking the state's Official Tax Register. If a workplace is in a designated LST area, you are required to withhold the tax from your employees' paychecks. It's important to remember that you only withhold the tax for pay periods during which the employee is actively working. This means you won't withhold LST from a paycheck that covers a period when an employee was on unpaid leave, for example.

Which Municipality Gets Paid First?

When an employee works in more than one municipality that imposes an LST, things can get tricky. Thankfully, there’s a clear order of operations to follow. The tax is owed first and foremost to the municipality where the employee’s main office is located—their principal place of employment. If that doesn't apply, the priority shifts to the municipality where the employee both lives and works. Finally, if neither of the first two conditions are met, the tax is paid to the working municipality that is closest to the employee's home. This priority system ensures there's no double-taxation and clarifies which local government gets the funds.

The Quarterly Collection and Payment Cycle

While you withhold LST from each paycheck, you don't send the money to the tax collector every week. Employers typically remit the collected LST funds on a quarterly basis. This streamlines the process, allowing you to manage payments in predictable cycles. It's a good idea to set calendar reminders for these deadlines to ensure timely filing. It's also worth noting that the rules are slightly different for the self-employed. According to the Department of Community and Economic Development, if a self-employed individual owes more than $10 in LST for the year, they are required to pay it in quarterly installments.

Tools and Best Practices for LST

Managing the Local Services Tax might seem like another complex task on your plate, but with the right approach, you can handle it smoothly and stay compliant. It’s all about setting up solid systems and using the right tools from the start. Think of it as building a strong foundation—once it’s in place, the day-to-day management becomes much simpler. By integrating LST into your existing processes and leaning on technology, you can reduce errors, save time, and remove the stress of local tax administration. Let’s walk through some practical steps and tools that can make a real difference for your business.

Integrating LST into Your Payroll System

Your payroll system is your command center for LST compliance. As an employer, you’re responsible for withholding the tax from employee paychecks and sending it to the correct local tax collector. This requires your system to accurately track each employee's work location and the specific tax rate for that jurisdiction. Trying to do this manually is a recipe for mistakes. Automating the process is the best way to ensure accuracy. Modern payroll platforms can handle these complexities, and some can even automate registration for local Pennsylvania taxes, simplifying compliance from day one.

Budgeting for LST

When planning your finances, remember that LST is collected incrementally throughout the year. The tax is assessed on a pro-rata basis, which means it’s spread out over the number of pay periods you have. According to the state's local services tax information, you calculate the per-paycheck amount by dividing the total annual LST rate by the number of pay periods your company has. For example, if the annual tax is $52 and you pay bi-weekly (26 pay periods), you would withhold $2 from each paycheck. Factoring this steady withholding into your cash flow and payroll budget prevents any surprises.

Best Practices for LST Administration

A little organization goes a long way in managing LST effectively. Start by keeping meticulous, up-to-date records of where each employee performs their work, as this determines their LST rate. It’s also smart to be proactive with exemption forms. Provide these forms to new hires and have them readily available for any employee whose income might qualify them for an exemption. This allows you to stop withholding for the year as soon as they are eligible. You can find helpful answers to common questions about LST exemptions to share with your team. Finally, make sure your payroll staff is trained on local tax rules to minimize compliance risks.

Helpful Software and Digital Tools

You don’t have to rely on spreadsheets and manual calculations to manage LST. Investing in software designed for payroll and tax compliance can streamline the entire process. These digital tools can automatically track different local tax rates, calculate the correct withholding amounts, and ensure timely remittance. Using dedicated Pennsylvania payroll tax software that handles both LST and EIT removes the guesswork and significantly reduces the chance of errors. This not only makes your team more efficient but also protects your business from potential penalties for non-compliance.

Where Does the LST Money Go?

When you withhold and remit the Local Services Tax, it’s easy to see it as just another line item on your payroll. But this tax is a direct investment in the communities where your business operates and your employees live. Understanding where the money goes can help you and your team see the value behind the deduction. The revenue is used locally to fund the essential services that keep a municipality running safely and smoothly.

Funding Emergency Services

A primary purpose of the LST is to ensure that critical emergency services are well-funded and ready to respond when needed. In Pennsylvania, it's mandated that at least 25% of all LST revenue must be used to support emergency services. This includes funding for local police departments, firefighter salaries and equipment, and emergency medical services (EMS). For business owners, this provides peace of mind, knowing that the community has the resources to protect your property and ensure the safety of your employees. It’s a direct contribution to a secure environment for everyone.

Supporting Local Infrastructure

Beyond emergency response, LST funds are vital for maintaining the physical foundation of your community. This revenue helps pay for the upkeep of local infrastructure, including road maintenance, bridge repairs, and public works projects. Well-maintained roads mean safer, more efficient commutes for your employees and smoother transportation for your goods and services. By contributing to infrastructure, the LST helps create a more attractive and functional environment, which is a key factor in a community’s economic health and a direct benefit to every business operating there.

Providing Property Tax Relief

In some cases, LST revenue can be used to ease the financial burden on local residents. Municipalities can apply these funds toward property tax relief for homeowners through programs like the homestead or farmstead exclusion. This helps make the community more affordable for your employees and other residents. It's important to note, however, that there are restrictions on this use; for example, school districts are not permitted to use LST funds for this purpose. This function of the LST demonstrates how it can contribute to the overall financial well-being of the local population.

Improving Community Services

Ultimately, the LST is a flexible source of funding that helps municipalities finance a wide range of important public services. Depending on local needs and priorities, the money might go toward parks and recreation, libraries, public health initiatives, or administrative functions that keep the local government running. By providing a steady stream of revenue, the LST allows local leaders to invest in projects and programs that improve the quality of life for everyone. For your business, this creates a more vibrant community, making it an attractive place to work and live.

Clearing Up Common LST Myths

The Local Services Tax can feel like just one more thing on your compliance checklist, and with any tax, misinformation can spread quickly. It’s easy to make assumptions based on how other taxes work, but the LST has its own set of rules that are important to get right. Let’s walk through some of the most common myths we hear from business owners and set the record straight. Getting clear on these points will help you manage your payroll with confidence and avoid any compliance headaches down the road.

Myth: It's Just Another Income Tax

It’s easy to see why this is a common misconception, since the LST is withheld from an employee’s paycheck. However, it isn't a traditional income tax. The LST is a local tax levied on individuals for the privilege of working within a specific jurisdiction. Think of it less as a tax on what you earn and more as a fee that helps fund essential community services like police, fire departments, and road maintenance. According to tax administrator Berkheimer, the Local Services Tax is specifically designed to support the municipality where an employee works, connecting the tax directly to the local benefits provided.

Myth: Everyone Is Eligible for an Exemption

While there are exemptions available, they are not universal. The most common one is the mandatory low-income exemption. Pennsylvania's Department of Community and Economic Development provides clear guidelines on this. If a municipality’s LST is more than $10, it must exempt any employee whose total earned income and net profits from all sources within that area is less than $12,000 for the year. There are also exemptions for active-duty military service. However, an employee can't simply decide not to pay it; they must meet specific criteria and submit the proper exemption form to their employer to qualify.

Myth: It's a One-Time Annual Tax

Unlike some taxes that are paid in a single lump sum, the LST is designed to be a small, manageable deduction taken over time. The law requires employers to withhold the tax from employee paychecks throughout the year. For example, if the annual LST is $52, you would withhold $1 from each weekly paycheck or $2 from each bi-weekly paycheck. This prorated approach prevents a larger, one-time financial hit for the employee and ensures a steady stream of funding for the municipality. It’s a consistent, ongoing withholding process, not a once-a-year payment.

Myth: Compliance Is Optional

This is a myth that can get businesses into serious trouble. LST compliance is mandatory for any employer operating in a jurisdiction that has enacted the tax. If your business's work location is in a municipality with an LST, you are legally required to withhold the tax from your employees' pay and remit it to the appropriate tax authority. Failing to do so can result in penalties, interest, and a lot of unnecessary stress. The state maintains an Official Tax Register that lists every municipality with an LST, so it’s crucial to check it and ensure your payroll system is set up correctly.

Frequently Asked Questions

What's my first step if I'm a new business owner in Pennsylvania? Your first move is to determine if your business's physical location is in a municipality that has a Local Services Tax. You can easily do this by checking the state's Official Tax Register online. If your location is listed, you are required to register with the local tax collector, set up LST withholding in your payroll system, and begin collecting the tax from your employees' paychecks.

How do I handle LST for my remote employees? The rule for remote workers is based on where they physically perform their work. If your employee works from their home, their LST obligation is tied to their home municipality, not your company's office location. You'll need to withhold and remit the tax based on the rate for their specific home address, which means keeping accurate records of where your distributed team is located.

What do I do if an employee tells me they pay LST at another job? An employee should only pay the LST once, up to the $52 annual maximum. The tax is owed to the municipality of their primary employer, which is typically the job where they earn the most money. You should have a process for employees to declare their primary employer. If you are the secondary employer, you would not withhold the tax once they provide the proper documentation.

Am I responsible for checking if an employee's exemption claim is accurate? No, you are not expected to investigate an employee's financial situation. Your responsibility is to process the paperwork they provide. When an employee gives you a completed LST Exemption Certificate, you must stop withholding the tax. Your job is to keep that form on file as proof; the accountability for the accuracy of the claim rests entirely with the employee.

What happens if I withhold LST, but the employee leaves before earning $12,000? If an employee pays into the LST but their total annual earnings end up below the exemption threshold, they are entitled to a refund for the amount they paid. They will need to file a refund claim directly with the local tax collector for the municipality where the tax was paid. You can support them by providing payroll records, but the employee is responsible for initiating the refund process.

Brad Parker