Pennsylvania Business Taxes at a Glance
Pennsylvania's tax system looks simple at the top: a single flat rate for personal income tax. Underneath, it has rules that set it apart from federal tax, a large network of local income taxes, and in Philadelphia, a separate set of city business taxes. BOMCAS helps Pennsylvania individuals and businesses work through each level.
Personal Income Tax: Flat Rate, Eight Classes
Pennsylvania taxes personal income at one flat rate, but it does not start from federal adjusted gross income. Instead, income is sorted into eight classes, such as compensation, net profits from a business, interest, dividends, net gains from property, rents and royalties, estate and trust income, and gambling and lottery winnings.
A loss in one class generally cannot offset income in another. A rental loss does not reduce wage income, and a business loss does not reduce capital gains. Pennsylvania also has its own rules for business expenses, retirement income, and depreciation. Many Pennsylvania returns therefore differ significantly from the federal return. We prepare the state return from the underlying records, not just from federal totals.
Pennsylvania offers Tax Forgiveness for lower-income households, which can reduce or eliminate the tax for eligible families.
Local Earned Income Tax and the Local Services Tax
Most Pennsylvania municipalities and school districts levy a local earned income tax on residents' wages and net profits. Under Act 32, these taxes are collected by countywide tax collection districts, and employers withhold based on both where an employee lives and where they work. Some areas also impose a nonresident rate.
Many municipalities also levy a Local Services Tax, a flat annual amount per worker withheld by the employer for people who work there, with an exemption for low earners.
For individuals, the local return is a separate filing. For employers, local withholding requires the employee's home address and work location, and the correct codes for each. We set up local withholding, prepare local returns, and reconcile local tax reports.
Philadelphia's Separate Taxes
Philadelphia has its own taxes, administered by the city's Department of Revenue:
- Wage Tax on residents' wages and on nonresidents' wages for work done in Philadelphia
- Net Profits Tax on residents' and nonresidents' net profits from unincorporated businesses
- Business Income and Receipts Tax (BIRT) on businesses doing business in the city, based on gross receipts and net income
Philadelphia also has its own tax rules for school income and use and occupancy, and a local addition to the sales tax. Remote and hybrid work affects nonresident wage tax, so records of where work was done matter. We prepare Philadelphia returns along with state filings.
Corporate Net Income Tax
Corporations doing business in Pennsylvania pay corporate net income tax on apportioned income. Under legislation enacted in 2022, the rate is decreasing each year, and it fell again on January 1, 2026. Pennsylvania also limits the use of net operating losses, and that limit is being increased in phases starting in 2026.
S corporations and partnerships are generally not subject to the corporate tax, but they file information returns and may need to withhold for nonresident owners. We prepare corporate returns, track NOL carryforwards under Pennsylvania's rules, and handle pass-through reporting.
Sales and Use Tax
Pennsylvania has a statewide sales and use tax, with a local addition in Allegheny County and Philadelphia. Clothing and most food are exempt, while some services and digital products are taxable. Businesses need a sales tax license and file monthly, quarterly, or semiannually depending on volume. We register businesses, file returns, and review use tax on purchases.
Realty Transfer Tax
Pennsylvania imposes a state realty transfer tax, and most local governments add their own. Transfers of interests in entities that own Pennsylvania real estate can also be taxable. We help real estate investors account for it in acquisitions and sales.
Inheritance Tax
Pennsylvania does not have an estate tax in the federal sense, but it does have an inheritance tax. The rate depends on the relationship between the person who died and the beneficiary, with transfers to a surviving spouse generally taxed at zero and higher rates for more distant relatives and unrelated heirs. The tax is reported on an inheritance tax return, and paying within a set period after death earns a discount. We help executors gather values, prepare the return, and keep estate accounting records alongside the decedent's final income tax returns.
Payroll With Local EIT and LST Withholding
Pennsylvania payroll involves several withholdings:
- State personal income tax
- Local earned income tax and Local Services Tax
- Philadelphia Wage Tax where it applies
- Unemployment compensation, where employees as well as employers contribute
Pennsylvania also has reciprocal agreements with several neighboring states, including New Jersey, so residents of those states working in Pennsylvania may have home-state tax withheld instead. We set up payroll for each of these rules and file the reports.
Health Systems, Manufacturing, Natural Gas, and Farms
- Health care and life sciences: practice accounting, multistate employees, and research credits on federal returns
- Manufacturing and logistics: fixed assets, inventory, and apportionment
- Professional services: owner compensation, local business taxes, and Philadelphia BIRT
- Agriculture: farm reporting and Pennsylvania's own income rules for farm income
Books Organized by PSD Code and Municipality
Pennsylvania's rules call for books that track income by class, payroll by employee home and work location, and gross receipts for Philadelphia BIRT. We set up the accounts and monthly close to produce these figures.
Working With BOMCAS in Pennsylvania
Employers matching PSD codes for every worksite, Philadelphia businesses filing BIRT and wage tax, and executors handling inheritance tax can contact BOMCAS for a remote review. Local pages for Pennsylvania cities and services are planned under this section. Return to the BOMCAS home page or see our United States services. This page explains Pennsylvania's system generally and does not decide how it applies to you.
Talk to BOMCAS About Your Pennsylvania Taxes
Have a question about your Pennsylvania filings, payroll or bookkeeping? Contact BOMCAS or use the contact form below, and we will get back to you as soon as possible. You can also browse all United States services.