October 28, 2026

Philadelphia Business Taxes: BIRT & NPT

Berk Gedik, CPA

CPA, Founder of Gedik CPA

What is BIRT?

The Business Income and Receipts Tax (BIRT) is Philadelphia's main business tax. It applies to every individual, partnership, LLC, and corporation doing business in the city.

BIRT taxes 5.71% of Philadelphia net income, and 0.141% of gross receipts. Because BIRT taxes both income and gross receipts, you can owe it even in a year you lose money. For example, a restaurant with $2,000,000 of Philadelphia receipts owes $2,820 of gross receipts tax, even if it is operating at a loss.

The good news is that both rates are falling. Under a 2025 ordinance, the gross receipts portion phases down to zero and the net income rate falls to 2.80% by tax year 2038.

The $100,000 exemption is gone

From 2016 through 2024, the first $100,000 of gross receipts (and a proportional share of net income) was exempt. That meant tens of thousands of small businesses and freelancers never filed a BIRT return, and many owners never knew the tax existed.

That ended with tax year 2025. After a medical device company sued the city, arguing the exemption violated the Pennsylvania constitution's uniformity clause, the city ended it rather than fight the case. Every business located in Philadelphia must now file a BIRT return, regardless of how small it is. The first returns without the exemption were due April 15, 2026.

Do I need to pay BIRT?

If your business is located in Philadelphia, yes. You must file a BIRT return every year, even if you owe nothing. If your business is located outside the city, you only have to file once you generate at least $100,000 of Philadelphia gross receipts in any 12-month period.

The key question is which of your receipts count as "Philadelphia receipts". Services are taxable under BIRT if they are performed in Philadelphia. For example, a designer who performs all the work from a Philadelphia office will owe BIRT even if all their clients are out of state, and they live out of state.

Software triggers BIRT when the customer receives the benefit in Philadelphia, regardless of where the work was performed. Similarly, tangible goods trigger BIRT when they are sold and delivered to a customer in Philadelphia.

This is also all subject to change. Philadelphia passed an ordinance in 2022 to switch services to market-based sourcing, but it only takes effect once Pennsylvania passes authorizing legislation, so for now, where the work is performed is what matters.

The Net Profits Tax (NPT)

The Net Profits Tax is Philadelphia's version of the wage tax for business owners who don't get a paycheck. It applies to unincorporated businesses: sole proprietors, partnerships, LLCs taxed as partnerships or sole proprietorships, estates, and trusts. Corporations, including S corporations, don't pay it.

For tax year 2025, the rate is 3.74% for Philadelphia residents and 3.43% for nonresidents. Residents pay NPT on their net profits wherever the business operates. Nonresidents pay only on profits from business conducted in Philadelphia.

The BIRT credit against NPT

Because an unincorporated business pays both BIRT and NPT on the same profit, the city allows a credit: 60% of the BIRT paid on the net income portion can be applied against NPT. The credit doesn't apply to the gross receipts portion.

For a Philadelphia-resident sole proprietor with $100,000 of profit, all earned in the city:

BIRT net income portion ($100,000 × 5.71%): $5,710
NPT before credit ($100,000 × 3.74%): $3,740
Less 60% BIRT credit ($5,710 × 60%): –$3,426
NPT after credit: $314
Total BIRT (net income) + NPT: $6,024

The credit wipes out most of the NPT, so make sure it's claimed. Leaving it off the return means paying thousands more than you owe.

Why S corporations can't use the credit

An S corporation pays BIRT like any other business, but because it's a corporation, it doesn't pay NPT, so there's nothing for the BIRT credit to offset. The owners don't escape city tax, though. They pay it in two other places:

Wage tax on the salary the S corp pays them (3.74% for residents).
School Income Tax (SIT) on S corp distributions, for Philadelphia residents (3.74%).

There is no BIRT credit against either one. The S corp's BIRT and the owner's SIT are layered on top of each other, which is why Philadelphia is one of the few places where an S corporation election can increase your local tax bill.

How can I minimize BIRT and NPT?

1. Be deliberate about nexus and where work is performed

Because services are sourced to where they're performed, a service business located outside Philadelphia that does its work outside the city has no Philadelphia receipts, and no BIRT, unless its Philadelphia receipts reach $100,000. For consultants, agencies, and other service firms with mostly remote clients, locating the office just outside city limits can eliminate BIRT entirely.

A few cautions before you move:

Where the work actually happens is what counts. Jobs performed at a client's Philadelphia location are still Philadelphia receipts, and a home office in the city can make your business "located" in Philadelphia.
Residents still pay NPT. If you live in Philadelphia and run an unincorporated business, you owe NPT on your profits wherever the business operates.
The rules may change. If Pennsylvania authorizes the city's 2022 market-based sourcing ordinance, services will be sourced to where the customer is, and moving the office won't help with Philadelphia clients.

2. Claim the credits you qualify for

Philadelphia offers several BIRT credits that go unclaimed simply because owners don't know about them. One example is the Healthy Beverages Tax Credit, available to Philadelphia stores in these categories:

Convenience food stores
Other specialty food stores
Gas stations with convenience stores
Limited-service restaurants

The credit equals the increase in what you spent buying healthy beverages (non-alcoholic drinks with no sugar or artificial sweeteners, like water and milk) compared to the prior year, up to $2,000. You must apply by February 15, be current on all city taxes, and unused credit doesn't carry forward.

Other programs worth checking include Jump Start Philadelphia, which offers a 0% BIRT and NPT rate for a new business's first two years if it hires at least three full-time, non-family employees working in Philadelphia, and the Job Creation Tax Credit.

3. Choose your entity structure with Philadelphia in mind

An S corporation election is the standard advice for saving self-employment tax, but in Philadelphia, the local math works against it. Here's the same $100,000 of profit from the earlier example, for a Philadelphia resident, as a sole proprietorship versus an S corp paying a $50,000 salary (tax year 2025 rates; the gross receipts portion is excluded since it's the same either way):

Sole proprietor

BIRT net income portion: $5,710
NPT after 60% BIRT credit: $314
Total Philadelphia tax: $6,024

S corp with a $50,000 salary

BIRT net income portion (on $50,000 after salary): $2,855
Wage tax on salary: $1,870
School Income Tax on $50,000 distribution: $1,870
Total Philadelphia tax: $6,595

The S corp pays about $570 more in city tax here. That doesn't mean the election is wrong. Federal payroll tax savings on $50,000 of distributions are usually several thousand dollars, which still outweighs the local cost. But the gap narrows, and at lower profit levels, or once you add payroll costs and a separate return, an S corp can stop making sense for a Philadelphia business. Run the full numbers, local taxes included, before electing.

Plan ahead, especially if 2026 was your first BIRT year

If you filed BIRT for the first time in April 2026, there's one more thing to plan for. First-time filers weren't required to make an estimated payment, but starting with the April 2027 return, BIRT is due along with an estimated payment for the next year equal to your full prior-year liability. For many small businesses, that means the April 2027 bill will be roughly double the last one. Setting money aside now avoids a cash crunch.

Philadelphia's business taxes reward owners who plan before year-end rather than react at filing time. Sourcing, credits, and entity choice are all decisions that need to be made in advance. Gedik CPA works with Philadelphia business owners on BIRT, NPT, and entity planning. Schedule a consultation to see where you stand.

Sources

This article is for general information only and isn't tax advice for your specific situation. Tax rates and rules change often, so confirm the current rules before acting. See our full disclaimer.