Learn Finnish: Kun sinulla on kauluspaita päällä ja kravatti kaulassa, olet juhlava. - When you have a collared shirt on and a tie around your neck, you are formal.

This is the core rule for wearing clothes in Finnish. Items worn on the torso or the whole body use the external local case päällä (literally on top). However, items worn on specific extremities or the neck take the internal local case. Therefore, a tie is kaulassa (in the neck), just like a hat is päässä (in the head) and gloves are kädessä (in the hand).

Doesn't pää mean head? Why is the shirt päällä if it is not on my head?

You are right that pää means head, but the adessive form päällä has evolved to mean on top of or wearing for general clothing and the torso. If you want to say something is specifically worn on your actual head, like a hat or glasses, you must use the inessive form päässä.

Why are kauluspaita and kravatti in the nominative case instead of an object case?

This sentence uses the Finnish have construction (sinulla on). In this structure, the person who has something is in the adessive case (sinulla), and the things they possess are grammatically the subjects of the sentence. Because they are the subjects, kauluspaita and kravatti must be in the nominative case.

The English translation says formal, but couldn't I also use virallinen?