Pennsylvania State Income Tax (2024)

Quick Reference

Tax Rate

Flat Rate: 3.07% on all taxable income

No brackets: Single rate regardless of income level or filing status

No filing status distinction: Same rate for single, married, head of household

Eight Classes of Taxable Income

Class 1 - Compensation: 3.07% - Wages, salaries, bonuses - Subject to withholding

Class 2 - Interest: 3.07% - All interest income - No withholding

Class 3 - Dividends: 3.07% - Dividend income - No withholding

Class 4 - Net Profits: 3.07% - Self-employment income - Business income

Class 5 - Net Gains: 3.07% - Capital gains - Sale of property

Class 6 - Rents and Royalties: 3.07% - Rental income - Royalty income

Class 7 - Estates and Trusts: 3.07% - Distributions from estates/trusts

Class 8 - Gambling and Lottery: 3.07% - PA lottery winnings - Gambling income

Quick Calculation

Total PA taxable income × 3.07% = State tax

Example: $100,000 income × 3.07% = $3,070 state tax

Details

Class 1 - Compensation

What's included:

Wages and salaries: - W-2 wages from employer - Tips and gratuities - Bonuses and commissions - Severance pay - Sick pay and vacation pay

Fringe benefits: - Taxable fringe benefits - Group term life insurance over $50,000 - Personal use of company car

Deferred compensation: - Nonqualified deferred compensation when received - Restricted stock when vested

Stock compensation: - Stock options when exercised (spread) - RSUs when vested

What's excluded:

Retirement distributions: - Pensions (see retirement-income.md) - IRA distributions - 401(k), 403(b) distributions - These are completely exempt, not Class 1

Other exclusions: - Workers compensation - Disability benefits (some) - Military pay (special rules)

Class 2 - Interest

Taxable interest:

All interest income is taxable: - Bank account interest - Savings bonds interest - Bond interest (corporate, municipal) - Tax refund interest - Interest on loans made

No PA exemption for: - US government bond interest (taxable for PA, unlike many states) - PA municipal bonds (taxable for PA) - Other states' municipal bonds

Federal vs. PA difference: - Many items tax-exempt for federal are taxable for PA - Must add back to PA return

Class 3 - Dividends

Taxable dividends:

Ordinary dividends: - Stock dividends from corporations - Mutual fund dividends - Real estate investment trust (REIT) dividends

Qualified dividends: - No PA distinction between ordinary and qualified - All taxed at 3.07% (no preferential rate)

Return of capital: - Not taxable (reduces basis) - Only true dividends taxable

Class 4 - Net Profits

Self-employment income:

Calculation: - Gross receipts from business - Less: ordinary and necessary business expenses - Result: Net profit (or loss)

Business types: - Sole proprietorship - Single-member LLC - Partnership (distributive share) - S corporation (distributive share, not wages)

Deductions allowed: - Ordinary and necessary business expenses - Depreciation - Section 179 expensing (PA may differ from federal)

Not allowed: - Personal expenses - Capital expenditures (must depreciate)

Net losses: - Can offset other income in same class - Can carry forward to future years (limited to 3 years in PA)

Class 5 - Net Gains

Capital gains:

What's included: - Sale of stocks and bonds - Sale of real estate (not principal residence in some cases) - Sale of business property - Sale of collectibles

PA does not distinguish: - Short-term vs. long-term (federal distinction doesn't apply) - All capital gains taxed at 3.07% - No preferential rate

Basis calculation: - Generally follows federal rules - Cost + improvements - depreciation = basis - Sales price - basis - selling costs = gain

Losses: - Capital losses offset capital gains - Net capital loss can offset other Class 5 income - Cannot offset other classes of income - Can carry forward 3 years

Exclusions: - Sale of principal residence (up to $250,000/$500,000) follows federal exclusion - Like-kind exchanges (1031) defer gain

Class 6 - Rents and Royalties

Rental income:

Real estate rentals: - Gross rents received - Less: expenses (mortgage interest, taxes, insurance, repairs, depreciation) - Result: Net rental income

Royalty income: - Oil and gas royalties - Mineral rights - Intellectual property royalties - Patent and copyright royalties

Expenses: - Ordinary and necessary rental expenses deductible - Depreciation allowed - Mortgage interest deductible (unlike federal Schedule A limitation)

Class 7 - Estates and Trusts

Distributions from estates and trusts:

Taxable: - Income distributions (DNI - distributable net income) - Accumulated income distributed

Not taxable: - Return of principal - Corpus distributions

PA fiduciary income tax: - Estates and trusts file PA-41 - Beneficiaries report distributions on PA-40

Class 8 - Gambling and Lottery

Gambling income:

Taxable: - Casino winnings - Racetrack winnings - Sports betting - Poker tournaments - PA lottery winnings over $600 (withholding threshold)

Losses: - Gambling losses deduct only against gambling winnings (same class) - Cannot create net loss in Class 8 - Cannot offset other classes

Withholding: - PA lottery withholds 3.07% on prizes over $5,000 - Casinos withhold on certain large payouts

Unique PA Rules

No standard deduction: - PA does not allow standard deduction - Cannot itemize deductions either (with very limited exceptions) - Flat tax on gross income by class

No personal exemptions: - Unlike federal (pre-2018), PA has no personal exemptions - No dependent exemptions - Tax calculated on full taxable income

Loss carryforwards: - Net losses in a class can carry forward 3 years - Cannot carry back - Must be tracked separately by class

Part-year allocation: - Residents: all income taxed (even from before/after PA residency for some classes) - Part-year residents: compensation allocated by days - Investment income (Classes 2, 3, 5, 6, 7, 8) allocated by source

Nonresident Allocation

Nonresidents only taxed on PA-source income:

PA-source by class:

Class 1 (Compensation): - Days worked in PA / total days worked × total compensation - Must track days in PA - No convenience of employer rule (unlike NY)

Class 2-3 (Interest/Dividends): - Only if from PA business or partnership

Class 4 (Net Profits): - Income from PA business - Partnership income from PA partnership (allocated by PA operations)

Class 5 (Net Gains): - Sale of PA real estate - Sale of PA business property

Class 6 (Rents/Royalties): - Income from PA real property - PA mineral rights

Class 7 (Estates/Trusts): - Distributions from PA estates/trusts (limited)

Class 8 (Gambling): - PA casino/lottery winnings

Withholding

Employer withholding required:

Rates: - 3.07% on PA compensation - Must withhold for residents and nonresidents

Nonresident employees: - Withholding required even for nonresidents - Unless covered by reciprocal agreement (NJ, IN, MD, OH, VA, WV) - Nonresident must file Form REV-419 to stop withholding

Forms: - REV-419 - Nonresident statement (for reciprocal states) - REV-413 - Withholding statement for residents

Estimated Tax

Required if: - Expect to owe $8,000 or more in PA tax - After withholding and credits

Quarterly payments: - April 15, June 15, September 15, January 15 - Use Form PA-40 ES

Safe harbor: - 90% of current year tax, OR - 100% of prior year tax

Underpayment penalty: - If fail to make required estimated payments - Interest on underpayment

Citations

Pennsylvania Tax Code: - 72 P.S. § 7303 - Classes of income - 72 P.S. § 7301(a) - Compensation - 72 P.S. § 7301(b) - Interest - 72 P.S. § 7301(c) - Dividends - 72 P.S. § 7301(d) - Net profits - 72 P.S. § 7301(e) - Net gains - 72 P.S. § 7301(f) - Rents and royalties - 72 P.S. § 7301(g) - Estate or trust income - 72 P.S. § 7301(h) - Gambling and lottery winnings - 72 P.S. § 7302(a) - Tax rate

Regulations: - 61 Pa. Code § 101.1 - Definitions - 61 Pa. Code § 101.6 - Classes of income - 61 Pa. Code § 103.1 - Compensation

PA Department of Revenue: - Personal Income Tax Guide (REV-466) - PA Employer Withholding Guide (REV-415) - https://www.revenue.pa.gov/

Forms: - PA-40 - PA Income Tax Return - PA-40 Schedule A - Interest Income - PA-40 Schedule B - Dividend Income - PA-40 Schedule C - Profit or Loss from Business - PA-40 Schedule D - Capital Gains and Losses - PA-40 Schedule E - Rents and Royalties - PA-40 ES - Estimated Tax - REV-419 - Employee Nonwithholding Application