What is a Pennsylvania S Corporation?
Pennsylvania automatically recognizes federal S corporation elections. The Pennsylvania Department of Revenue confirms that businesses electing federal Subchapter S status are considered Pennsylvania S corporations unless they opt out.
Pennsylvania S corporations are subject to corporate net income tax only on built-in gains, while shareholders report their pro rata share of income on personal returns at Pennsylvania's 3.07% personal income tax rate.
Step 1: Choose Your Business Structure
Before electing S corporation tax status, you must first establish either a corporation or limited liability company (LLC) in Pennsylvania. The IRS specifies that S corporation status is a tax designation, not a business structure.
Forming a Corporation
To form a corporation in Pennsylvania, file Articles of Incorporation with the Pennsylvania Department of State. The filing fee is $125, and documents can be submitted through the Business Filing Services portal. Processing typically takes seven to ten business days.
Forming an LLC
Alternatively, establish an LLC by filing a Certificate of Organization with the Pennsylvania Department of State Bureau of Corporations and Charitable Organizations. The filing fee is also $125. LLCs can elect S corporation tax treatment while maintaining operational flexibility.
Step 2: Verify Name Availability
Pennsylvania law requires corporate names to include "Corporation," "Company," "Incorporated," "Limited," or their abbreviations. Verify name availability through the Pennsylvania Department of State's business entity search. Names must be distinguishable from existing Pennsylvania business entities.
Step 3: Obtain an Employer Identification Number (EIN)
Apply for an EIN through the IRS online application tool. The U.S. Small Business Administration confirms this service is free and takes minutes to complete. You'll need your Social Security Number and basic business information.
⚠️ Important
The IRS issues EINs immediately upon online application approval. Do not pay third-party services for EIN applications—the IRS provides this service at no cost.
Step 4: File Form 2553 to Elect S Corporation Status
Submit IRS Form 2553 (Election by a Small Business Corporation) to elect S corporation tax treatment. The IRS requires filing within two months and 15 days after the beginning of your tax year. For calendar-year businesses, this deadline is typically March 15.
S Corporation Eligibility Requirements
To qualify for S corporation status, your business must meet IRS eligibility criteria:
- Be a domestic corporation based in the United States
- Have no more than 100 shareholders
- Have only allowable shareholders (individuals, certain trusts, and estates—not partnerships or corporations)
- Have only one class of stock
- Not be an ineligible corporation type (such as certain financial institutions or insurance companies)
All shareholders must sign Form 2553 consenting to the S corporation election. The form cannot be filed electronically and must be mailed or faxed to the appropriate IRS Service Center based on your state location.
Step 5: Understand Pennsylvania Tax Requirements
Pennsylvania automatically recognizes your federal S corporation election. However, Pennsylvania S corporations must file specific state tax returns. The Pennsylvania Department of Revenue requires:
PA-20S/PA-65 Information Return
File the PA-20S/PA-65 S Corporation/Partnership Information Return annually. This return reports income, deductions, gains, and losses from business operations. Submit a complete copy of your federal Form 1120-S with all schedules.
RCT-101 Corporate Tax Report
Pennsylvania S corporations doing business in the state must file the RCT-101 PA Corporate Tax Report. This report addresses capital stock and franchise tax obligations.
Built-In Gains Tax
Unlike C corporations, Pennsylvania S corporations pay corporate net income tax only on net recognized built-in gains. For tax years beginning January 1, 1995 through December 31, 2022, the rate was 9.99%, with scheduled reductions for subsequent years.
Step 6: Opt Out of Pennsylvania S Corporation Status (Optional)
If you prefer C corporation tax treatment at the state level while maintaining federal S corporation status, file Form REV-976 (Election Not to be Taxed as a Pennsylvania S Corporation). All shareholders must sign this election, and it cannot be revoked for five years.
Step 7: Maintain Compliance
Annual Reporting
Beginning in 2024, Pennsylvania requires all business entities to file annual reports with a $7 filing fee. File through the Pennsylvania Department of State Business Filing Services portal.
Payroll and Employment Taxes
S corporation owners who work in the business must receive reasonable compensation. The IRS scrutinizes owner salaries to ensure they reflect market rates for similar work. Register for federal payroll taxes through the IRS Electronic Federal Tax Payment System.
Pennsylvania employment taxes are administered by the Pennsylvania Department of Labor and Industry. Register for unemployment compensation and withholding taxes as required.
Tax Benefits of Pennsylvania S Corporations
Pennsylvania S corporations provide pass-through taxation that eliminates double taxation on business income. Shareholders report their pro rata share of corporate income on personal returns, avoiding entity-level federal income tax. The Pennsylvania Department of Revenue taxes shareholders at the 3.07% personal income tax rate on their distributive share.
💰 Tax Savings Opportunity
S corporation owners can reduce self-employment tax liability by splitting income between reasonable salary and distributions. Distributions are not subject to self-employment taxes, potentially saving thousands annually compared to sole proprietorships or standard LLCs.
Common Questions
Does Pennsylvania require a registered agent?
Pennsylvania is one of few states not requiring registered agents. However, designating an agent ensures you receive legal documents and state communications promptly.
Can I file Form 2553 late?
The IRS allows late election relief under Revenue Procedure 2013-30 if you meet specific criteria, including timely filing Form 1120-S and treating the business as an S corporation in practice.
How long does S corporation approval take?
The IRS typically processes Form 2553 within 60 days, notifying you of acceptance or rejection via mail.
Additional Resources
Need Professional Help?
While this guide provides comprehensive information about forming an S Corporation in Pennsylvania, many business owners prefer professional assistance to ensure compliance and avoid costly mistakes.
This guide provides general information about forming S corporations in Pennsylvania. Consult qualified legal and tax professionals for advice specific to your business situation.