LLC vs S-Corp — Pennsylvania

Pennsylvania has a flat personal income tax of 3.07 percent and a separate corporate net income tax that applies only to C corporations. Pennsylvania generally follows federal S corporation treatment, so S corps are taxed as pass-through entities at the state level. The Pennsylvania Department of State Bureau of Corporations and Charitable Organizations handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. A Pennsylvania LLC can elect to be taxed as an S corporation. Pennsylvania LLC basics. - Certificate of Organization filed with the Pennsylvania Department of State (Form DSCB:15-8821). - Filing fee is $125.00. Filing is available online through the Business Filing Services portal or by mail. - Annual report required. Under Act 122 of 2022, effective January 1, 2025, Pennsylvania replaced its prior decennial report with an annual report. The annual report for LLCs is due by September 30 each year, with a $7 filing fee. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. - LLC pass-through income flows to the owner's Pennsylvania personal income tax return at the flat 3.07 percent rate. Pennsylvania S corp basics. - Pennsylvania automatically recognizes the federal S corporation election. An entity taxed as an S corp federally is an S corp for Pennsylvania personal income tax purposes, unless the entity files Form REV-976 to opt out and be taxed as a Pennsylvania C corp. - S corporations file Pennsylvania Form PA-20S/PA-65 (S Corporation/Partnership Information Return). Shareholders receive a PA Schedule RK-1 or NRK-1 and report their share of S corp income on their PA-40 personal return at 3.07 percent. - Pennsylvania's Corporate Net Income Tax (CNIT) applies to C corporations. Under Act 53 of 2022, the CNIT rate is being phased down from 9.99 percent (pre-2023) to 4.99 percent. The rate is 7.49 percent for 2026 and steps down 0.5 percentage points per year: 6.99 percent in 2027, 6.49 percent in 2028, 5.99 percent in 2029, 5.49 percent in 2030, and 4.99 percent in 2031 and thereafter. S corps generally do not pay CNIT because they are pass-through. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Pennsylvania has state employer withholding and unemployment compensation tax administered by the Department of Revenue and the Department of Labor & Industry, which apply once the business has employees. Why a Pennsylvania trades shop might still elect S corp. The primary reason is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Pennsylvania's flat 3.07 percent personal income tax applies to both LLC pass-through income and S corp shareholder income, so the state-level bill is similar between the two. The delta is federal. Rule of thumb. Start as a Pennsylvania LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Pennsylvania construction clients can run the breakeven for your numbers and confirm the Pennsylvania annual filings and local taxes (Philadelphia BIRT and NPT, Pittsburgh local taxes, or township earned income tax as applicable).