If you live or work in Philadelphia, you’re dealing with two income taxes stacked on top of each other: Pennsylvania’s flat 3.07% Personal Income Tax and Philadelphia’s own Wage Tax, which sits at 3.74% for residents and 3.43% for non-residents working inside city limits as of July 1, 2025. Residents with investment or other unearned income owe a third tax, the School Income Tax, at 3.74%. A credit built into the state return keeps the state and city from both collecting in full on the same wages, but the details of residency, remote work, and refunds decide how much you actually pay.
The Pennsylvania Flat Rate
Pennsylvania taxes individual income at a flat 3.07%, with no brackets, no standard deduction, and no personal exemption.1Department of Revenue. Tax Rates2Tax Foundation. State Individual Income Tax Rates and Brackets, 2024 The rate applies the same to your first dollar of taxable income as to your last, across wages, interest, dividends, business profits, capital gains, rents, estate and trust income, and gambling winnings.
Retirees catch a break. Social Security benefits are fully exempt, and distributions from qualifying retirement plans are exempt once you reach retirement age.3PA.gov. PA Personal Income Tax Guide – Gross Compensation IRA distributions count as exempt as long as no federal early-withdrawal penalty applies. Payouts from plans that don’t qualify as eligible Pennsylvania retirement plans stay taxable regardless of your age.
The filing threshold is nominal: any resident, part-year resident, or nonresident with Pennsylvania-source income producing $1 or more in tax owes a PA-40.4Department of Revenue. Brief Overview and Filing Requirements For practical purposes, if you earned money in the state, you file.
The Philadelphia Wage Tax
On top of the state’s 3.07%, Philadelphia charges its own Wage Tax on salaries, wages, commissions, and other earned compensation. Rates change each July 1. As of July 1, 2025, residents pay 3.74% and non-residents pay 3.43%.5City of Philadelphia. Earnings Tax (employees) Both rates apply to gross compensation, not to net pay.
Residency drives everything. If you live in Philadelphia, the 3.74% rate applies to all your earned income no matter where you physically work. A city resident commuting to a suburban office, or working remotely for an out-of-state employer, still owes the full resident rate. Non-residents owe the 3.43% rate only on income for work actually performed inside city limits.
Remote Work by Non-Residents
For non-residents who split time between a Philadelphia office and a home office elsewhere, the city uses a “requirement of the employer” test. If your employer requires you to work remotely and gives you no option to come into the Philadelphia office, wages for those remote days aren’t subject to the Wage Tax.6City of Philadelphia Law Department. Request Letter Ruling – Corporation and Affiliates – City Wage Tax – Requirement of the Employer Standard
If remote work is merely offered or encouraged, and you could choose to come into the office, the city treats those days as personal convenience and taxes the wages. The one exception the city has recognized is when an employer has reduced office space as a cost-saving measure and genuinely cannot accommodate you in Philadelphia.6City of Philadelphia Law Department. Request Letter Ruling – Corporation and Affiliates – City Wage Tax – Requirement of the Employer Standard Hybrid workers who assume three days at home means three days off the tax roll often owe more than they expect.
The School Income Tax
The tax most newcomers miss. If you’re a Philadelphia resident with unearned income — dividends, interest, short-term capital gains, S-corp or limited partnership income, gambling winnings, royalties, and some rental and trust income — you owe the School Income Tax on those categories.7City of Philadelphia. School Income Tax The current SIT rate is 3.74% for residents.8City of Philadelphia. Philly Extends Deadline for Relief Program, Announces Tax Cuts
The Wage Tax and the SIT cover different income categories. Your salary is a Wage Tax item; your dividends are an SIT item. Both remain subject to Pennsylvania’s 3.07% state rate on top. A city resident with a mix of a paycheck and investment income is being taxed by Philadelphia from two directions plus by the state on both. The annual SIT return is due April 15 of the following year.9City of Philadelphia Department of Revenue. General Information for School Income Tax (SIT) Instructions
How the Credit Keeps You From Paying Twice
The state and city assess their taxes separately, but a credit on your PA-40 keeps the same wages from being taxed in full at both levels. A Philadelphia resident can claim a credit on the state return for Wage Tax paid to the city, equal to the lesser of the Wage Tax paid or 3.07% of the income subject to both taxes.10Pennsylvania Department of Revenue. PA Personal Income Tax Guide Deductions and Credits
Because the 3.74% city rate is higher than the 3.07% state rate, the credit effectively wipes out the state tax on wages that already went through the Wage Tax. Your total on those wages ends up at 3.74%, paid to Philadelphia, rather than 3.74% plus 3.07% stacked. Residents with only wage income often owe nothing on their state return after applying the credit.
If You Cross State Lines
Pennsylvania and New Jersey have a reciprocal wage agreement: a New Jersey resident working in Pennsylvania is taxed on those wages by New Jersey rather than Pennsylvania, and vice versa. The agreement does not cover the Philadelphia Wage Tax. A New Jersey resident commuting to a Philadelphia office still owes the 3.43% non-resident city rate on income earned in the city, and New Jersey allows a credit on the NJ return for Philadelphia Wage Tax paid.11NJ.gov. Credit for Taxes Paid to Other Jurisdictions
Working the other way, if you live in Philadelphia and work in another state, that state generally taxes your income. Pennsylvania gives you a credit on the PA-40 for tax paid to the other state, capped at 3.07% of the income earned there.12Pennsylvania Department of Revenue. PA Schedule G-L – Resident Credit for Taxes Paid Philadelphia, though, gives no credit against its Wage Tax for state income taxes paid elsewhere. You owe the full 3.74% resident Wage Tax on those wages regardless. The city does credit local (city or county) taxes paid to jurisdictions outside Pennsylvania; you request the refund by filing a petition marked “WYNNE” with documentation of the local taxes paid, capped at the lower of what you paid the other locality or what you paid Philadelphia on the same income.13City of Philadelphia. Request a Refund for Taxes Paid to Local Jurisdictions
Relief for Lower-Income Households
Pennsylvania offers Tax Forgiveness through Schedule SP, which can reduce or eliminate the state tax for lower-income households. Eligibility depends on filing status, family size, and “eligibility income,” a figure broader than taxable income because it includes some nontaxable sources. A married couple with two children can qualify with eligibility income up to $34,250; a single parent with two children can qualify up to $27,750.14Department of Revenue. Tax Forgiveness Forgiveness percentages run from 100% down to 10% depending on where your income lands within your family’s threshold.
Philadelphia ties its own relief to that state program. If you qualify for Pennsylvania Tax Forgiveness, the city reduces your effective Wage Tax rate to 1.5% and refunds the difference between what was withheld at the full rate and what you owe at 1.5%.15City of Philadelphia. Wage Tax (employers) You submit your completed PA Schedule SP with the city refund petition, and the city cross-checks the numbers against the state’s records, so what you file has to match.14Department of Revenue. Tax Forgiveness
Philadelphia residents can also claim a Wage Tax refund for unreimbursed employee business expenses that Pennsylvania allows as a deduction. You complete PA Schedule UE with your state return first, then attach the approved schedule to a city refund petition.16Department of Revenue. Unreimbursed Business Expenses The state deduction has to come through before the city will follow.
Filing, Withholding, and Refunds
Most employees have the Wage Tax withheld from every paycheck. If you’re a resident and the withholding rate is correct, filing a PA-40 and claiming the resident credit usually covers you. Non-residents whose employers withheld the full city Wage Tax while they worked some days outside Philadelphia can claim a refund on the over-withheld portion.
The non-resident refund petition needs three pieces: a copy of your W-2, a date-and-location worksheet showing which days you worked outside the city, and an Employer Certification Letter on company letterhead confirming the remote arrangement.17City of Philadelphia. Wage Tax Policy Guidance for Non-Resident Employees in the Era of Remote Work The city is strict about the paperwork; a missing template or worksheet gets petitions rejected. All refund claims have to be filed within three years from the date the tax was paid or due, whichever is later.18City of Philadelphia. Request a Wage Tax Refund
If your employer doesn’t withhold the Wage Tax, you pay the equivalent Earnings Tax quarterly and file an annual reconciliation by April 15 of the following year.5City of Philadelphia. Earnings Tax (employees) The city handles nearly all filings through the Philadelphia Tax Center; paper returns are largely no longer accepted.
Penalties and Appeal Rights
Late payments on Philadelphia taxes compound quickly. For 2026, the city charges 0.75% per month in interest (9% annualized) on unpaid balances, plus a 1.25% monthly penalty, for a combined 2% per month or 24% per year.19City of Philadelphia. Interest, Penalties, and Fees A small underpayment can grow substantially over a few quarters.
If the Philadelphia Department of Revenue sends you an assessment you believe is wrong, you can petition the Tax Review Board within 60 days of the notice.20City of Philadelphia. Petition for a Tax Appeal The 60-day window covers Wage Tax, Earnings Tax, BIRT, and School Income Tax assessments. Missing it generally forfeits your right to contest.