Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
My wife and I are both self-employed—she as a writer and I as a graphic designer. We do nearly all of our work from home, and currently, we’re both sole proprietors declaring all of the proceeds of our work as income. The “businesses” don’t retain earnings or anything like that.
We’ll soon be moving back to the Philadelphia area (we’re natives of PA), and we’re trying to get a sense of how strenuous a tax burden we’ll be facing if we end up moving into the city limits. I’m familiar with the state’s flat 3.07% income tax, and I also know that many suburban townships and boroughs charge residents an income tax around one percent.
Obviously Philadelphia charges residents a wage tax of 3.9004%, and my cursory investigation suggested that I’d have to pay the same percentage, but as a net profits tax—essentially our one-person businesses’ profits being our incomes.
But am I also required to pay the business income and receipts tax? And if so, on what? If my one-person business brings in $100,000 in a year and I spend $10,000 on business expenses, the $90,000 that remains is my personal income. In a sense the “business” hasn’t made any money; I have.
Is this a situation in which I’ll need to create a corporate entity of some kind so that the corporation pays me a salary that’s equal to its receipts, leaving its net income as zero?
I know the likely answer is “contact an accountant,” but I’d appreciate any input other self-employed Philadelphians could provide. Thanks.
You should contact an accountant, but your research sounds correct. You will not pay the wage tax; that is paid by employees. You will be subject to the Net Profits Tax, which is the wage tax rate on self-employment earnings. There is also the Business Income and Receipts Tax, with a gross receipts component and an income tax component. Here is the good news, though. There are $100,000 deductions for both of these taxes, which means if you and your wife each gross $100k, your tax should be $0.
Also, if you live in the city there is the School Income Tax which is the wage tax rate on investment income such as dividends and rents.
What gets lost in all of this is the fact that Philadelphia's property taxes are low (at least compared to its suburbs which have lower income taxes) so if you own a house, you might get some of these other taxes back. Plus you'd be in the city where things are more convenient and there's less driving expenses.
Also, there is a movement underway to change the way the city taxes property, with the underlying goal of raising commercial property taxes (supported by many in the the business community and the city's largest landlords and developers) in order to cut the wage tax and the Business Income and Receipts tax. This has gained significant traction and it seems reasonably possible it will pass.
My wife and I are both self-employed—she as a writer and I as a graphic designer. We do nearly all of our work from home, and currently, we’re both sole proprietors declaring all of the proceeds of our work as income. The “businesses” don’t retain earnings or anything like that.
We’ll soon be moving back to the Philadelphia area (we’re natives of PA), and we’re trying to get a sense of how strenuous a tax burden we’ll be facing if we end up moving into the city limits. I’m familiar with the state’s flat 3.07% income tax, and I also know that many suburban townships and boroughs charge residents an income tax around one percent.
Obviously Philadelphia charges residents a wage tax of 3.9004%, and my cursory investigation suggested that I’d have to pay the same percentage, but as a net profits tax—essentially our one-person businesses’ profits being our incomes.
But am I also required to pay the business income and receipts tax? And if so, on what? If my one-person business brings in $100,000 in a year and I spend $10,000 on business expenses, the $90,000 that remains is my personal income. In a sense the “business” hasn’t made any money; I have.
Is this a situation in which I’ll need to create a corporate entity of some kind so that the corporation pays me a salary that’s equal to its receipts, leaving its net income as zero?
I know the likely answer is “contact an accountant,” but I’d appreciate any input other self-employed Philadelphians could provide. Thanks.
I run a small business in Philadelphia and had the same questions. There's a website that goes over everything and what you might be exempt from: https://business.phila.gov/understand-taxes/
The only tax that applies to me is the Net Profits tax, which is essentially the same as the wage tax. It's actually less than what you would pay if you were employed by a company, because you pay the tax on the profits of your business, not gross income (this is per my accountant). So instead of paying the 3.9004% on 100,000, you might pay it on 60,000 if you had 40,000 in expenses. I think it's paid twice a year, per the website, but my accountant is handling the stipends that I'll be sending in via his automated program.
As far as the Business Income & Receipts tax, I don't think it matters if you're a sole proprietor or not. If your registered business made income, there's tax owed. However, the exemption for 2016 and onward was increased from 75k to 100k. So this tax does not apply if you made under 100k. I don't know specifics, but I believe my accountant sends something to the city stating the total earnings (some sort of tax statement), and for that tax there's no filing required based on the number being below 100k. Here's a helpful link: https://business.phila.gov/overview-...-receipts-tax/, and another: https://beta.phila.gov/services/paym...ipts-tax-birt/
There's all sorts of other taxes, like the Use & Occupancy Tax, which might apply to you. I would consult an accountant who knows the Philadelphia market well and can help with what does/doesn't apply to you.
You should contact an accountant, but your research sounds correct. You will not pay the wage tax; that is paid by employees. You will be subject to the Net Profits Tax, which is the wage tax rate on self-employment earnings. There is also the Business Income and Receipts Tax, with a gross receipts component and an income tax component. Here is the good news, though. There are $100,000 deductions for both of these taxes, which means if you and your wife each gross $100k, your tax should be $0.
Also, if you live in the city there is the School Income Tax which is the wage tax rate on investment income such as dividends and rents.
What gets lost in all of this is the fact that Philadelphia's property taxes are low (at least compared to its suburbs which have lower income taxes) so if you own a house, you might get some of these other taxes back. Plus you'd be in the city where things are more convenient and there's less driving expenses.
Also, there is a movement underway to change the way the city taxes property, with the underlying goal of raising commercial property taxes (supported by many in the the business community and the city's largest landlords and developers) in order to cut the wage tax and the Business Income and Receipts tax. This has gained significant traction and it seems reasonably possible it will pass.
Good luck!
Agree on all points except the exemption for the Net Profits tax. I don't see anywhere that there's a deduction of $100k for this particular tax.
Agree on all points except the exemption for the Net Profits tax. I don't see anywhere that there's a deduction of $100k for this particular tax.
My post was worded somewhat confusingly. There are exemptions on the gross receipts tax portion of the BIRT and the net income tax portion of the BIRT. Not on the NPT.
My post was worded somewhat confusingly. There are exemptions on the gross receipts tax portion of the BIRT and the net income tax portion of the BIRT. Not on the NPT.
Gotcha. It's all slightly confusing, essentially requiring a CPA unless you want to risk filing incorrectly, late fees, etc.
Fortunately, a family member who lived in Philadelphia for several years knows a tax attorney in the city, and this family member cashed in a favor to get me some free advice. As soon as I hear back from the attorney, I’ll post what I’ve learned—in case anyone with a similar situation is peeking in at this thread.
I got an answer from a tax attorney, and the bottom line is that I am responsible for a bit more than just the 3.9004%.
First, there is of course 3.9004% in the form of the Net Profits Tax—which I had expected.
But in addition to that, I’m also responsible for two separate elements of the Business Income and Receipts Tax. There’s a 0.1415% tax on gross receipts over $100,000, which is fairly insignificant for me and likely most middle-income professionals (though still irksome because you could be losing money at the end of the year and still owe this tax). You’re also taxed at 6.39% on net income, but there’s an exclusion amount (that the tax attorney didn’t even attempt to explain due to its complexity), plus you get a credit for a portion of the Net Profits Tax that you’ve already paid.
Since I don’t want to mis-explain anything and possibly give wrong information, I’ll just relay the attorney’s assessment of a round-number example I gave to her. Let’s say you took in $125,000 in gross revenue with $25,000 in business expenses—clearing a $100,000 profit. Your taxes would look like this:
Net Profits Tax: $3,900
Gross Receipts Tax: $35
Business Income Tax: $1,278
Less NPT credit: -$788 Total local tax liability: $4,425
In other words, for self-employed person earning around $100,000 annually, your effective local tax rate is around 4.5%. This assumes that the self employment does not involve renting property or retail sales, neither of which apply in my case.
I hope this helps anyone who might be a similar situation, but due to the complexity of the BIRT exclusion calculation, you should definitely get in touch with a tax professional to find out your actual tax liability.
I got an answer from a tax attorney, and the bottom line is that I am responsible for a bit more than just the 3.9004%.
First, there is of course 3.9004% in the form of the Net Profits Tax—which I had expected.
But in addition to that, I’m also responsible for two separate elements of the Business Income and Receipts Tax. There’s a 0.1415% tax on gross receipts over $100,000, which is fairly insignificant for me and likely most middle-income professionals (though still irksome because you could be losing money at the end of the year and still owe this tax). You’re also taxed at 6.39% on net income, but there’s an exclusion amount (that the tax attorney didn’t even attempt to explain due to its complexity), plus you get a credit for a portion of the Net Profits Tax that you’ve already paid.
Since I don’t want to mis-explain anything and possibly give wrong information, I’ll just relay the attorney’s assessment of a round-number example I gave to her. Let’s say you took in $125,000 in gross revenue with $25,000 in business expenses—clearing a $100,000 profit. Your taxes would look like this:
Net Profits Tax: $3,900
Gross Receipts Tax: $35
Business Income Tax: $1,278
Less NPT credit: -$788 Total local tax liability: $4,425
In other words, for self-employed person earning around $100,000 annually, your effective local tax rate is around 4.5%. This assumes that the self employment does not involve renting property or retail sales, neither of which apply in my case.
I hope this helps anyone who might be a similar situation, but due to the complexity of the BIRT exclusion calculation, you should definitely get in touch with a tax professional to find out your actual tax liability.
This was really helpful, thanks for sharing!
Do you know if the $100k exemption also applies to the net income part of the BIRT? Is that the NPT credit you're referring to? I'm assuming so based on the Philly biz site: "In tax year 2015, there is an exemption of the first $75,000 in gross receipts and a proportionate share of net income from the business income and receipts tax. This increases to a $100,000 exemption in tax year 2016 and every year thereafter."
Do you know if the $100k exemption also applies to the net income part of the BIRT? Is that the NPT credit you're referring to?
I’m probably out of my depth trying to answer this question, but I’ll give it an honest attempt.
The 6.39% tax on net income has an an exclusion amount—which the tax attorney didn’t explain due to the complexity of how it is calculated, but she did say that the exclusion amount would be no greater than $100,000.
So after you calculate your exclusion amount and determine the tax due, you then apply the 60% credit for the Net Profits Tax already paid to get the bottom line tax amount owed.
Like I said, I’m out of my depth here, so the takeaway message is that you’ll need to contact a tax professional to know for sure. The City of Philadelphia has a downloadable manual describing how the various elements of BIRT are calculated, and it’s nearly 150 pages long but available here if you want to try to figure it out: https://beta.phila.gov/media/2017012...mp-1.13.17.doc
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
