Pennsylvania: your local income tax goes to a private company

Everything about Pennsylvania's state-level taxes is mild. Personal income is a flat 3.07% with no brackets. Sales tax is 6% at nearly every address, on one of the narrowest bases in the country. The annual report is $7.

Then you hire someone, and you discover a layer of tax administration that exists nowhere else: an Earned Income Tax withheld at a rate calculated per employee, remitted quarterly to a private company whose identity depends on the county, under a statute most payroll software will not configure for you unless you tell it exactly what to do.

If you never hire anyone, most of this page is background. If you do, the first payroll run is the wrong moment to start reading about PSD codes.

The combined Earned Income Tax a municipality and its school district may levy is capped at 1% under the Local Tax Enabling Act, split 50/50 between them unless they agree otherwise — so most of the state sits at or near 1%. Home rule municipalities and Act 47 distressed municipalities may exceed the cap, and Philadelphia is a separate system entirely.

The rate you actually withhold is not a single number. For each employee it is the higher of that employee's resident EIT rate or the non-resident rate at the work location. Two people at neighbouring desks, living in different boroughs, are withheld at different percentages — legitimately, permanently, and on every run.

Separately from the Earned Income Tax, a municipality may levy a Local Services Tax on everyone who works there — residents and commuters alike. The combined municipal and school district rate is capped at $52 a year.

Fifty-two dollars is not the problem. The mechanics are. Where the combined rate exceeds $10, the tax must be withheld pro rata across pay periods — $1 a week on a weekly payroll — rather than taken in one deduction. And anyone earning under $12,000 within that political subdivision must be exempted, which means collecting exemption certificates from part-time and seasonal staff and stopping their deduction.

So a tax worth $52 requires a per-employee, per-pay-period calculation with an income-based exemption attached to it. It is the clearest example of the Pennsylvania pattern: small amounts of money, administered at full complexity.

Pennsylvania is one of a small number of states where employees contribute to unemployment as well as employers. The employee withholding is 0.07% of gross wages — 70 cents per $1,000 — and unlike the employer's share it is not limited to the taxable wage base. It applies to total gross wages, all the way up.

A $10,000 taxable wage base is one of the lowest in the country, so the employer's unemployment cost per head is capped early and predictably — $382 a year at the new-employer rate. The uncapped employee side is small in percentage terms but shows up on every payslip, including on a $200,000 salary.

Workers' compensation is compulsory from the first employee, with no headcount minimum. The employers outside the duty are those all of whose workers fall into a narrow list: sole proprietors or general partners with no other employees, LLC members who are the only workers, excluded executive officers, casual and domestic workers who have not elected in, agricultural labour under $1,200 a year, and federal, railroad and longshore workers. Cover can be bought from a private carrier, from the State Workers' Insurance Fund — which competes rather than holding a monopoly, so it is worth a quote — or self-insured with departmental approval.

Going without is criminal rather than merely expensive: a misdemeanour carrying $2,500 and up to a year for each day in violation, and a felony carrying $15,000 and up to seven years for each day the failure was intentional. There is no version of this worth risking to save a premium.

Philadelphia opts out of the Act 32 machinery entirely. It taxes under the Sterling Act, is paid directly by you to the City, and layers a tax on the business itself on top of the tax on wages.

The repeal of the $100,000 gross receipts exemption is the change to plan around. A tax on gross receipts is owed whether or not the year was profitable, so if you are within the city limits, model the BIRT against revenue rather than margin — the runway calculator is the right place to put it, alongside the wage tax on any staff.

After all that, here is where Pennsylvania is genuinely one of the easier states. The sales tax base is among the narrowest in the country, the licence is free, and outside two jurisdictions the rate is a flat 6% at every address.

Everyday clothing and footwear are exempt with no per-item cap — unlike New York or Massachusetts, where the exemption stops at a threshold. Groceries are exempt, and so are both prescription and non-prescription medicines. Most services are outside the tax entirely.

The Sales, Use and Hotel Occupancy licence is applied for through myPATH at no cost and renews itself every five years provided nothing is outstanding. It must be in place before the first taxable sale. If you sell only services, you very likely need nothing at all.

For about a decade Pennsylvania asked LLCs for nothing on a recurring basis. That changed in 2025: every LLC now files an annual report costing $7, due September 30, with the window opening 1 January.

The teeth arrive later. From the 2027 report onwards, missing it dissolves the LLC six months after the deadline. Seven dollars and five minutes, against the entity that holds your contracts, your bank account and your liability protection. Put 1 September in the calendar now, repeating annually, and file it in the first week the window is open rather than the last.

Two other timings worth knowing at formation. The Department of State asks filers to allow 15 business days for processing, online or on paper — slow by modern standards, so start before you need the entity. Expedited service exists and is priced accordingly: $100 for same-day if received before 10:00, $300 for three-hour service before 14:00, and $1,000 for one-hour service before 16:00, on top of the filing fee, non-refundable, and not accepted by post. The formation fee and the comparison with every other state is on the LLC hub.