Key Takeaways

  • A Pennsylvania S corporation (S corp) is a corporation that meets federal Subchapter S requirements and enjoys pass-through taxation at the state level unless it files Form REV-976 to opt out.
  • S corps in Pennsylvania combine limited liability protection with pass-through taxation, avoiding the corporate-level tax imposed on C corporations.
  • To qualify, a corporation must meet IRS eligibility criteria, file IRS Form 2553, and comply with Pennsylvania-specific filing requirements.
  • The PA-20S/PA-65 Information Return must be filed annually, with specific schedules and supporting documentation for resident and nonresident shareholders.
  • Pennsylvania S corps must still follow corporate formalities, and choosing this status can have advantages and disadvantages compared to LLCs and C corps.

What Is a PA S Corp?

A PA S corp is any domestic or foreign corporation that is operating in the state of Pennsylvania and doing business. The only exceptions are businesses that have completed the Election Not to be Taxed as a Pennsylvania S Corporation form, which is REV-976. Unless the domestic or foreign S corporation has filed Form REV-976, it must follow all personal income and corporation tax requirements and regulations that apply in the state. 

In the past, corporations that elected to be taxed as S corporations had to file Form REV-1640, which is the Corporation Election and Shareholder's consent form in the state. However, starting with the tax year of January 1, 2006, this requirement was lifted from corporations operating in the state. Since Act 67 passed in 2006, all S corporations that fall under federal subchapter S are recognized in the state of Pennsylvania. This act also outlines that any federal subchapter S corporation can elect not to be taxed as S corporations in the state. 

In order to change the taxation election, the owner must complete and file Form REV-976, which is the Election Not to be Taxed as a Pennsylvania S Corporation form. The form must be turned in before the first period of when the business owners want the election to take effect. The benefits of S corporations in Pennsylvania include pass-through taxation of all profits from the business, the more formal business structure of a corporation, and limited liability for the owners.

An S corporation operating within the state starts as a standard corporation. It only becomes an S corporation when the shareholders of the business choose to file Form 2553 with the IRS, which is the formal way to elect the federal tax status. Form 2553 can only be filed after the shareholders have filed official tax documents with the appropriate state office. Similar to a C corporation, the state of Pennsylvania recognizes an S corporation as its own separate entity. It may be treated like a person, separated from the owners of the company. 

Shareholders of S corporations can take advantage of the limited liability for any obligations, liabilities, and debts of the business. Legal action taken against the business likely wouldn't extend to the individual shareholders on a personal level either.

The only difference between S and C corporations is the way that taxes are handled. The shareholders of a corporation must decide whether they want to elect for taxation as a C or an S corporation. A C corporation is taxed based on regulations in the IRS Code, subchapter C, while an S corporation follows the rules in subchapter S. If the shareholders don't fill out and file the election form, the default taxation is as a C corporation. 

By electing for S corporation taxation, the corporation must follow all tax rules outlined in the IRS Code subchapter S. This code was enacted in 1958 and undergoes periodic amendments as needed. Prior to being taxed in this way, the corporation must receive approval from the IRS to change its status to Subchapter S. As its own person or legal entity, an S corporation is distinct and separate from the shareholders of the business.

Eligibility Requirements for an S Corp in Pennsylvania

To be recognized as an S corp in Pennsylvania, a business must first qualify for S corporation status under federal law. The IRS imposes strict eligibility criteria, including:

  • The business must be a domestic corporation.
  • Shareholders must be U.S. citizens or resident individuals, certain estates, or specific trusts.
  • The corporation cannot have more than 100 shareholders.
  • The corporation can issue only one class of stock.
  • Certain types of businesses—such as specific financial institutions, insurance companies, and domestic international sales corporations—are ineligible.

Once the corporation meets these requirements, it must file IRS Form 2553 within the required time frame, signed by all shareholders. In Pennsylvania, no separate state-level election is needed for businesses that want to be treated the same way for state tax purposes, unless they wish to opt out by filing Form REV-976.

Advantages and Disadvantages of a Pennsylvania S Corp

Advantages:

  • Pass-Through Taxation: Income is taxed only at the shareholder level, avoiding corporate-level tax.
  • Limited Liability: Shareholders are not personally responsible for the corporation’s debts and obligations.
  • Credibility and Structure: As a formal corporation, an S corp can appear more professional to investors and clients.
  • Potential Self-Employment Tax Savings: Shareholders who actively work in the business may classify part of their earnings as distributions rather than salary, potentially lowering self-employment taxes.

Disadvantages:

  • Ownership Restrictions: Limits on shareholders and stock classes can hinder investment opportunities.
  • Ongoing Formalities: Regular meetings, minutes, and detailed records are required.
  • IRS Scrutiny on Compensation: The IRS closely monitors whether shareholder-employees are paid a “reasonable salary.”
  • Franchise and Other State Taxes: While avoiding Pennsylvania corporate net income tax, S corps are still subject to other state fees or taxes.

Filing the PA-20S/PA-65 Information Return

If a corporation is recognized as an S corporation on a federal level but the shareholders haven't elected for taxation as an S corporation through the state of Pennsylvania, the business must file the Information Return (Form PA-20S/PA-65) with the state. This form will report the losses, deductions, income, etc. from the operations of the business. All losses and profits of an S corporation in Pennsylvania can be passed through the business to shareholders, both residing inside and outside of the state. Those shareholders must report their shares on their individual tax returns. 

If Form PA-20S/PA-65 is required, additional information must be filed with it, including:

  • Supporting documents and statements
  • Schedules NRK-1 and RK-1 (which come from other pass-through business entities)
  • Federal Form 1120S
  • Federal Schedule K-1

Additionally, S corporation shareholders should include any copies of the federal Schedule RK-1 that have been provided to shareholders within the state, along with federal Schedule NRK-1 that have been provided to shareholders that do not reside within the state. If applicable, the information return should also include the catch-up or final withholding payment. If the PA-20S/PA-65 information return includes a final withholding payment, it should be sent to a different address than if it doesn't. 

Annual Filing and Compliance Requirements

In addition to the PA-20S/PA-65 return, Pennsylvania S corps must meet annual state compliance requirements:

  • Annual Report: Corporations must file a Pennsylvania annual report and pay any applicable filing fees.
  • Withholding for Nonresidents: If a shareholder lives outside Pennsylvania, the corporation must withhold Pennsylvania personal income tax on that shareholder’s share of income.
  • Corporate Formalities: Maintain bylaws, hold annual shareholder and director meetings, and keep minutes.
  • Franchise Taxes and Fees: While Pennsylvania does not impose a traditional franchise tax on S corps, some municipalities may require local business taxes or permits.

Failure to meet these obligations can result in penalties, interest charges, or—in severe cases—the loss of S corporation status.

Comparing S Corps and LLCs in Pennsylvania

For Pennsylvania entrepreneurs deciding between forming an S corp or an LLC, key differences include:

  • Taxation: Both LLCs and S corps offer pass-through taxation, but S corps can sometimes reduce self-employment taxes for shareholder-employees.
  • Ownership Structure: LLCs have fewer restrictions on ownership and can allocate profits and losses more flexibly, while S corps have strict shareholder and stock rules.
  • Management: LLCs offer flexibility in management, while S corps follow a formal corporate governance structure with directors and officers.
  • Formality and Paperwork: S corps require more ongoing documentation than LLCs, which may appeal to or deter business owners depending on their preferences.

Many small business owners consult with accountants or attorneys to decide which structure best aligns with their growth goals, liability concerns, and tax strategies.

Frequently Asked Questions

  1. Do I need to file a separate form to elect S corp status in Pennsylvania?
    No, if you have federal S corp status, Pennsylvania recognizes it automatically unless you opt out by filing Form REV-976.
  2. Can a Pennsylvania LLC be taxed as an S corp?
    Yes. An LLC can elect S corp taxation by filing IRS Form 2553 if it meets eligibility rules.
  3. What taxes do Pennsylvania S corps pay?
    They do not pay the state corporate net income tax, but they may be subject to local business taxes and must withhold taxes for nonresident shareholders.
  4. How often must an S corp file the PA-20S/PA-65 return?
    Annually, along with supporting documents such as Schedules RK-1 and NRK-1 for shareholders.
  5. Can a Pennsylvania S corp have more than one class of stock?
    No, S corps can issue only one class of stock, though differences in voting rights are permitted.

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