Pennsylvania has two very different tax rates for businesses. Corporations pay one of the higher rates in the country, but the Corporate Net Income Tax is falling fast: it's 7.49% in 2026 on its way to 4.99% in 2031. Individuals and pass-through owners pay a flat 3.07%, one of the lowest rates of any state with an income tax. The complication is local taxes: almost every municipality and school district taxes earned income, and Philadelphia has its own business taxes.
This guide covers Pennsylvania's business taxes for 2026, with worked examples and comparisons with its six neighbors.
Pennsylvania business taxes at a glance
A Pennsylvania C corporation pays 7.49% on profit in 2026, a rate that drops by half a point every year. Pass-through owners pay a flat 3.07% at the state level plus a local earned income tax of about 1% to 2% on net profits in most places, or more in Philadelphia. Customers pay 6% sales tax, or 7% in Allegheny County and 8% in Philadelphia. Employers withhold local taxes and the Local Services Tax for each employee. Formation costs $125, and the new annual report costs only $7. Pennsylvania offers no pass-through entity tax election.
Corporate Net Income Tax
| Tax year | CNIT rate |
|---|---|
| 2023 | 8.99% |
| 2024 | 8.49% |
| 2025 | 7.99% |
| 2026 | 7.49% |
| 2027 | 6.99% |
| 2028 | 6.49% |
| 2029 | 5.99% |
| 2030 | 5.49% |
| 2031 onward | 4.99% |
- Net operating losses: The deduction is limited to 40% of taxable income, increasing in steps to 80% by 2029 under a 2024 law.
- Apportionment: Single sales factor with market-based sourcing.
- Combined reporting: Not required; Pennsylvania uses separate company reporting.
- Credits: Research and development credit, Keystone Opportunity Zones, job creation credits and the film production credit.
- Returns: Form RCT-101 is due 30 days after the federal due date.
Personal income tax and pass-through owners
Pennsylvania's flat 3.07% applies to eight classes of income, including compensation, net profits, interest, dividends and gains.
- Classes don't mix: A loss from one business can offset income from another business, but not wages or interest.
- Limited deductions: Pennsylvania doesn't allow a standard deduction or most federal deductions, so taxable income can be higher than federal.
- LLC owners, partners and sole proprietors pay 3.07% on profit.
- S corporation shareholders pay on their share.
- No PTE election: Owners cannot pay state tax at the entity level.
Local taxes
| Tax | Typical rate | Who pays |
|---|---|---|
| Earned income tax (EIT) | About 1% to 2% (combined municipal and school district) | Residents and workers on wages and net profits |
| Local Services Tax | Up to $52 per year | Employees working in the municipality |
| Philadelphia wage tax | About 3.7% residents, 3.4% nonresidents | Wages and net profits |
| Philadelphia BIRT | About 1.4 mills on gross receipts plus about 5.7% of net income | Businesses in Philadelphia |
| Pittsburgh payroll expense tax | 0.55% of payroll | Employers in Pittsburgh |
Since 2012, local earned income taxes are collected by county tax collection districts. Employers withhold based on employees' home and work locations.
Sales and use tax
| Location | Combined rate |
|---|---|
| Most of Pennsylvania | 6% |
| Allegheny County (Pittsburgh) | 7% |
| Philadelphia | 8% |
- Clothing and most groceries are exempt.
- Services: Pennsylvania taxes some services, including building maintenance, employment agency services and some computer services.
- Digital products such as streaming and downloaded software are taxable.
- Remote sellers with more than $100,000 of Pennsylvania sales must collect.
Payroll and property taxes
- Unemployment insurance: Employers pay on the first $10,000 of each employee's wages. Employees also contribute 0.07% of wages.
- Realty transfer tax: 1% state plus local taxes, typically for a total of 2% or more, on sales of real estate.
- Property tax: Real property is taxed locally, with high rates in many school districts. Business equipment and inventory are not taxed.
Forming a business in Pennsylvania: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $125 | $125 |
| Annual report | $7 (from 2025) | $7 (from 2025) |
| Docketing statement | Required for corporations | Required |
| Registered office | Required | Required |
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| Pennsylvania CNIT at 7.49% | $37,450 |
| Federal tax at 21% on $462,550 | $97,136 |
| Total income tax | $134,586 (26.9%) |
A Philadelphia corporation would add BIRT on receipts and net income. For a single LLC owner with $150,000 of Pennsylvania income, state tax is $4,605. At $75,000 it is $2,303. Add local earned income tax of about 1% to 2%, or about 3.7% in Philadelphia.
How Pennsylvania compares with its neighbors
| State | Corporate rate | Top personal rate | State sales tax |
|---|---|---|---|
| Pennsylvania | 7.49% (falling) | 3.07% plus local | 6% |
| New York | 6.5% to 7.25% | 10.9% | 4% plus local |
| New Jersey | 6.5% to 9% | 10.75% | 6.625% |
| Delaware | 8.7% | 6.6% | None |
| Maryland | 8.25% | 6.5% plus county | 6% |
| West Virginia | 6.5% | 4.58% | 6% |
| Ohio | None (CAT) | 2.75% plus municipal | 5.75% |
Pennsylvania's personal income tax is far below New York's, New Jersey's and Maryland's, which makes it attractive for pass-through owners in the Philadelphia region. Its corporate rate will be among the lowest in the Northeast by 2031.
Choosing an entity in Pennsylvania
- LLC: Owners pay 3.07% plus local tax; $7 annual report.
- S corporation: Pennsylvania recognizes the federal S election automatically. Owners pay 3.07%, and S corporation wages are subject to local EIT while distributions generally aren't.
- C corporation: 7.49% plus 21% federally in 2026, falling each year.
For most small businesses, pass-through treatment remains cheaper in Pennsylvania because the gap between 3.07% and the corporate rate is large.
Doing business across Pennsylvania
Pennsylvania's two big metros sit at opposite ends of the state. Philadelphia, with its higher local taxes, is part of a region that includes New Jersey and Delaware suburbs, and many businesses locate in the surrounding counties of Bucks, Chester, Delaware and Montgomery to avoid city taxes. Pittsburgh has lower local business taxes and a growing technology and robotics sector. Pennsylvania and New Jersey have a reciprocal agreement for wages, as do Pennsylvania and several other neighbors, so employees pay income tax only to their home state on wages earned across the border.
Tax planning tips for Pennsylvania businesses
Locate outside Philadelphia if the numbers work. The difference between Philadelphia's wage tax and BIRT and a suburban EIT of about 1% can be substantial for a profitable business.
Plan for the NOL limit. Corporations with large losses can deduct only a portion of income each year, though the limit rises to 80% by 2029. Model the effect on cash taxes.
Understand the classes of income. Business losses can't offset wages or investment income for Pennsylvania purposes. Owners with a loss-making business and other income may pay more Pennsylvania tax than expected.
Recent changes for 2025 and 2026
- CNIT rate cut to 7.49% for 2026.
- Annual reports replaced decennial reports from 2025, at $7.
- NOL deduction limit increasing from 40% under a 2024 law.
- Philadelphia continues to lower its wage tax and BIRT rates.
Is Pennsylvania a good state for business?
Advantages
- Low flat 3.07% personal income tax
- Corporate rate falling every year to 4.99%
- Low formation and annual report fees
- Large markets and strong universities and health systems
Drawbacks
- Widespread local earned income taxes
- High Philadelphia business and wage taxes
- No pass-through entity tax election
- Limited deductions and separate income classes
Compliance checklist
- File a Certificate of Organization or Articles of Incorporation with the Department of State.
- Register with the Department of Revenue through myPATH for sales tax, withholding and corporate taxes.
- Register with your local tax collector for earned income tax withholding.
- Register for unemployment compensation if you hire.
- File the $7 annual report each year.
- File Form RCT-101, PA-20S/PA-65 or PA-40 each year.
Compare Pennsylvania with its neighbors below or estimate your taxes in the United States calculator. See LLC taxes for more.