Pennsylvania S Corp Tax Rules: Election, Filings, and Withholding

A Pennsylvania S corporation is exempt from the state’s 7.49% corporate net income tax; its income passes through to shareholders, who pay Pennsylvania’s flat 3.07% personal income tax on their share whether the corporation distributes the cash or not.¹² That rate gap is the whole point of the election. Getting there, and staying there, means understanding how Pennsylvania S corp tax rules diverge from the federal treatment you may already be familiar with.

How the Pass-Through Actually Works

Under the Tax Reform Code, a Pennsylvania S corporation is generally not subject to corporate net income tax.¹ Each shareholder reports a pro rata share of the corporation’s income on their PA-40 return and pays the 3.07% personal rate.² The comparison point is the 7.49% corporate net income tax rate for calendar-year 2026.³

Note the phrase “whether the corporation distributes the cash or not.” Shareholders owe Pennsylvania tax on their share of the corporation’s income for the year even if no money leaves the business. Owners who don’t set that money aside are in for a rough April.

There is one situation where a Pennsylvania S corporation still owes corporate net income tax: a corporation that converted from C status and carries accumulated earnings and profits can be taxed on its net recognized built-in gains, using the same calculation the IRS applies under IRC Section 1374.⁴⁵ A converted corporation that sells appreciated assets within the five-year recognition period pays both the 21% federal built-in gains tax and the 7.49% Pennsylvania corporate net income tax on those gains. Corporations that have always been S corporations do not face this exposure.

You Must File a Separate Pennsylvania Election

Pennsylvania does not piggyback on your federal Form 2553. You have to file Form REV-1640, the Pennsylvania S Corporation Election and Shareholder Consent, with the Department of Revenue.⁴ This is the single most common tripwire for new S corp owners in Pennsylvania: they file the federal election and assume the state follows. It does not.

The federal election is still a prerequisite. Pennsylvania will only recognize an S corporation that has made a valid Subchapter S election with the IRS and meets the federal eligibility rules: no more than 100 shareholders, only individuals and certain estates and trusts as shareholders, one class of stock, and a domestic corporation that isn’t an ineligible entity type.⁶ Lose the federal status and the Pennsylvania status dies with it.

Deadlines

An existing corporation must file REV-1640 by the 15th day of the third month of the tax year it wants the election to cover.⁴ For a calendar-year corporation, that’s March 15. Miss it and the corporation is a C corporation for the full year. There’s no retroactive fix.

A newly formed corporation has 75 days from the date of incorporation, or the date it begins business activity if later, to file for its first tax year. A foreign corporation entering Pennsylvania for the first time gets 75 days from the start of its first Pennsylvania tax year.⁴

What the Form Requires

Every shareholder on record the day the election is filed must sign the form or provide separate written consent. REV-1640 collects each shareholder’s name, address, Social Security number, percentage owned, and share-acquisition date, plus the corporation’s EIN and tax-year start date. The information must match your federal filing; mismatches get elections rejected.

The regulation directs that the original executed form be mailed by certified mail; electronic filing through myPATH may also be available.⁷ There is no filing fee. Keep the Department’s confirmation letter with your permanent corporate records.

Where Pennsylvania Rejects Federal Treatment

This is where owners get burned. Pennsylvania does not just import your federal K-1 numbers. The state has its own classes of income and refuses to follow several federal provisions that S corp shareholders count on elsewhere.⁸ The differences you’re most likely to hit:

No bonus depreciation. If you took 100% or 60% bonus federally, you have to recompute depreciation for Pennsylvania using standard recovery periods.
Section 179 capped at $25,000, with the $200,000 investment phase-out threshold from January 1, 1997 still in effect. Federal limits are far higher; Pennsylvania frozen at 1997.
No like-kind exchange deferral. Pennsylvania does not follow IRC Section 1031, so gain deferred federally is still recognized on your PA return.
No cancellation-of-debt exclusion. Debt forgiveness excluded from federal income under IRC Section 108 is taxable in Pennsylvania.
No IRC 338(h)(10) election. A stock sale treated as an asset sale federally is still a stock sale in Pennsylvania.

The net effect: a shareholder’s Pennsylvania taxable income from an S corporation can differ substantially from the federal K-1 amount. Copying the federal number onto the state return will produce the wrong tax.

Annual Filings You Have to Keep Up

PA-20S/PA-65 Information Return

Every Pennsylvania S corporation files a PA-20S/PA-65 Information Return with the Department of Revenue.⁸ For calendar-year filers, the deadline is April 15. The return reports the corporation’s income, losses, and credits, and computes each shareholder’s distributive share. You must also issue a PA Schedule RK-1 to each resident shareholder and a PA Schedule NRK-1 to each nonresident shareholder so they can complete their PA-40 returns.

Penalties apply for late filing and for missing schedules. Each omitted RK-1 or NRK-1 can trigger its own penalty, which stacks fast in a corporation with several shareholders.

Annual Report With the Department of State

Starting in 2025, most Pennsylvania business entities, including S corporations, must file an annual report with the Department of State under Act 122 of 2022. The report confirms the corporation’s name, registered office, principal office, and the names of at least one director and any principal officers. The fee is $7 for business corporations.⁹ Persistent failure to file can lead to administrative dissolution.

Shareholder Returns

Each shareholder reports their share on a PA-40 and pays 3.07%.² Again: the tax is owed on the allocated income, not on the cash distributed.

Nonresident Shareholder Withholding

If any shareholder is a nonresident individual, estate, or trust, the corporation must withhold Pennsylvania personal income tax on that owner’s expected share of Pennsylvania-source income. The requirement dates to Act 22 of 1991.⁸ The withholding rate is 3.07%. The corporation remits the withholding to the Department of Revenue; the nonresident shareholder claims credit on their Pennsylvania return.

Skipping the withholding puts the corporation on the hook for the unpaid tax plus interest. Multi-state S corporations that add an out-of-state shareholder without updating payroll and distribution procedures often discover this the hard way.

Revoking the Election, and the Five-Year Lockout

Shareholders holding more than half of the outstanding shares must consent in writing to revoke the federal election. Timing controls the effective date: a revocation filed on or before March 15 of a calendar year takes effect January 1 of that same year; one filed after March 15 takes effect the following January 1, unless a later date is specified.¹⁰

Pennsylvania uses the same majority-consent threshold for revoking the state election. When a mid-year revocation takes effect, the year splits: the pre-revocation portion is a short S corporation tax year, and the remainder is a short C corporation tax year subject to corporate net income tax.⁴

Once revoked or terminated, a Pennsylvania S election cannot be remade until the fifth tax year after the year the revocation or termination took effect.⁴ The federal rule imposes a similar five-year bar absent IRS consent to earlier re-election. Revocation is not easily undone, so treat it as a long-term decision.

1
Pennsylvania General Assembly. Pennsylvania Statutes Title 72 PS Taxation and Fiscal Affairs – Section 7307-8
2
Commonwealth of Pennsylvania. Personal Income Tax
3
Commonwealth of Pennsylvania. Corporation Tax Rates
4
Pennsylvania Code and Bulletin. 61 Pa Code 9.13 – Pennsylvania S Corporation Election
5
Office of the Law Revision Counsel. 26 USC 1374 – Tax Imposed on Certain Built-In Gains
6
Office of the Law Revision Counsel. 26 USC 1361 – S Corporation Defined
7
Legal Information Institute. Pennsylvania Code 61 Section 9.13 – Pennsylvania S Corporation Election
8
Commonwealth of Pennsylvania. Pass Through Entities
9
Commonwealth of Pennsylvania. Annual Reports
10
Office of the Law Revision Counsel. 26 US Code 1362 – Election, Revocation, Termination