Amounts Paid for Dependent Care No Longer Taxed in PA

Effective December 14, 2023, amounts paid or incurred by an employer for dependent care assistance provided to an employee under an IRC § 129 dependent care assistance program are not included in the employee’s taxable compensation for Pennsylvania personal income tax purposes. This includes:

(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.

Dependent care expenses paid through a Code Section 125 plan are already not taxed by the federal government and most states up to $5000 per year. This will mean tax savings for both employers and employees.

Since the change was late in the year, employers have probably withheld taxes from Pennsylvania employees’ pay, and employees might have already received W-2s showing the amounts as taxable for 2023. This link will go to the PA Department of Revenue site with information about how to handle 2023 tax returns: Act 34 of 2023 – Dependent Care Plan (Section 129) – Employer Info.

Employers with employees in PA should consult with their tax advisors regarding the withholding of taxes for these types of dependent care as a result of the law change.