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PA Source Income Rules

Pennsylvania personal income tax is imposed upon eight classes of income — (1) compensation, (2) net gains from the disposition of property, (3) net profits, (4) net gains from rents, royalties, patents and copyrights, (5) interest, (6) dividends, (7) estate and trust income, (8) and gambling income. PA residents are subject to tax on all eight classes of income regardless of the source of the income. Nonresidents are subject to tax on the eight classes of income from PA sources.

Generally, PA source income is income derived from activity or property located in PA. Such income includes:

  1. Income from ownership or disposition of real or personal property located in PA. For example, rental income from PA property or the sale of real estate located in PA.
  2. Income from work performed in PA, such as personal services or business income.
  3. Income from intangible property employed in a trade, profession, occupation or business carried on in the Commonwealth.
  4. Gambling and lottery winnings from a wager placed in PA.

A distributive share of income from pass-through entities (partnerships and S corporations) from the above sources of income is also PA source income.

Question: How does a payor determine the amount of income that is subject to PA withholding?

Answer: When income is derived from activity or property both within and outside of PA, the income must be apportioned and allocated in a fair and equitable manner. There is no single method for apportioning and allocating income. Any apportionment and allocation methods used by a taxpayer are subject to review by the Department of Revenue.

Generally, income should be specifically apportioned and allocated based upon the location of the activity or the property that generates the income. However, if the source of the income is not readily ascertainable, other apportionment methods can be used, such as:

  1. For services performed both in and outside PA, the income from such services may be apportioned and allocated based upon working days within and outside the Commonwealth.
  2. If the income is based upon volume of activity, such as commissions of a salesman, the income may be apportioned based upon the volume of activity within and outside PA.
  3. If a business does not keep specific records of the source of its income, three-factor apportionment (property, payroll and sales factors) may be used to apportion and allocate the business income.

For specific rules related to PA source income and apportionment and allocation rules, see 61 Pa. Code §§ 101.8 and 109.1-109.9.