Another strange but true Pennsylvania payroll tax issue: Most municipalities in PA calculate their local PR tax the same way that the state does - gross wages less cafeteria and pension plan deductions that are pre-tax. Easy to set up in PR Deduction Maintenance. Philadelphia, however, bases their local tax only on gross wages. If the deduction code is set up to lower local taxes, the employees living in Philly are not having enough local tax withheld, and the employer is not in compliance. Other than creating a completely separate set of deduction codes for Philadelphia residents, is there any other way to correctly calculate the Philadelphia Wage Tax for employees living in Philly but having cafeteria and pension plan deductions?