Philly small businesses face a big tax headache as an exemption ends
Even with extensive city guidance, “it becomes a logistical nightmare” for small taxpayers, who may have to hire professionals to figure out what they owe and exemptions that can reduce the total.
Small-business advisers and advocates are bracing for a wave of questions as the city’s Business Income & Receipts tax (BIRT), Philadelphia’s municipal tax that hits both sales and profits, expands to cover tens of thousands of small businesses and self-employed workers as they pay their 2025 taxes.
City revenue officials expect to collect more than $35 million in new BIRT payments this year from the expanded pool of taxpayers, even with slightly lower tax rates.
Businesses are concerned not only about the cost of the tax but also trying to follow the city’s complex business tax rules and incentives, even as the city prepares to spend millions helping first-time business taxpayers.
“This is applicable to every sole proprietorship, limited-liability company, incorporation, or partnership engaged in a business, profession, or activity for profit in the City of Philadelphia,” said Scott S. Small, trust counsel in the Philadelphia-area office of Fiduciary Trust International, a New York-based advisory firm for families and business owners.
“Think of folks that have houses they rent. Daycare in their homes. For-hire drivers at Uber or Lyft. Estates and trusts that own property,” Small said. “A return now has to be filed, regardless of whether you made a profit.”
Even with extensive city guidance, “it becomes a logistical nightmare” for small taxpayers, who may have to hire professionals to figure out what they owe and exemptions that can reduce the total, said Will Gonzalez, who runs CEIBA, a Latino business and economic education group.
Business taxes and the general difficulty of doing business in Philadelphia were “the number one issues” reported in a survey of 200 city businesses by the Independence Business Alliance, a chamber of commerce for LGBTQ+ business owners, that was presented to members of Mayor Cherelle L. Parker’s tax reform commission last year, said Zach Wilcha, the alliance’s chief executive.
“Small businesses pay on revenues, sales, profits [there is a separate net profits tax along with the BIRT income tax], and wages,“ Wilcha said. ”People love being in Philadelphia; they want to stay here. But they feel the tax structure is forcing them to leave.”
Eliminating the BIRT’s income tax and curbing the revenue tax has been a longtime goal of business advocacy groups like the Chamber of Commerce for Greater Philadelphia. It was a goal of business members on the tax reform commission. City leaders in the end decided on gradual rate reductions instead, a move tax commission chair Richard Vague called “disheartening.”
The BIRT tax rate on sales is dropping by half a penny per $1,000 this tax season to $1.41 per $1,000 of sales. And the income tax is decreasing to $57.10 per $1,000 of profits from $58.10. The city plans to slowly cut the revenue tax to zero and the BIRT income tax by half by 2039.
But this year, far more taxpayers will be paying the tax, which is due by April.
» READ MORE: What small business owners need to know about the major changes coming to Philly’s tax code
Philadelphia formerly exempted businesses that gross less than $100,000 in sales per year from paying BIRT. That exemption failed to survive a court challenge. Under the “uniformity clause” of the Pennsylvania state constitution, taxes can’t exempt whole classes of taxpayers based on income.
“It’s the same reason we can’t have a [state or local] tax just on billionaires, or millionaires,” Small said.
The use and occupancy tax exemption for businesses with property worth under $2,000 is also gone, leaving more small-business owners liable for that 1.21% a year tax, paid in monthly installments.
A bill proposed by Councilmember Mike Driscoll that would exempt solo entrepreneurs from paying the business income and revenue taxes has not advanced in Council.
The city collected around $680 million in BIRT business taxes last year, about 10.5% of city revenues.
Among Pennsylvania communities, only a handful, including Radnor Township on Philadelphia’s Main Line, charge similar business taxes.
Kathleen McColgan, Parker’s revenue commissioner, says Philadelphia expects to collect “an additional $35 million to $40 million in fiscal year 2026″ from the broadened BIRT. The city has earmarked that money for “commerce and business development.”
City officials have said they will spend $7.5 million this year for programs to help new taxpayers figure out how to manage the city’s complicated tax programs and exemptions.
In recent years, the city has collected BIRT from around 40,000 larger businesses, McColgan said. She estimates that 50,000 businesses that have paid other city taxes will start owing BIRT for the first time. Roughly 25,000 other registered businesses that hadn’t incurred any taxes in recent years before might also owe.
City officials could provide no estimate of how many businesses that never registered to pay taxes may be required to pay BIRT for the first time.
To spread the word, McColgan said the city sent around 80,000 notices to registered business taxpayers in and outside the city, plus 119,000 postcards to businesses “who may have a responsibility to file” from lists the city purchased from a private vendor.
Besides the promised multilingual tax education and assistance for first-time filers, officials noted that the city has an array of tax discounts that can reduce the small-business burden.
First-time filers can get an extension if they can’t get the form in by April 15, but they will still owe the tax accruing from that date with any late fees.
And, after the first year, taxpayers are expected to pay the next year’s BIRT in advance, in quarterly installments.
Even with the city’s initial guidance, many first-time taxpayers will need professional help to navigate all those rules and realize available discounts, Small said. “It’s a nightmare” for a layperson to attempt to follow all the instructions and file correctly.
“People want to pay their taxes,” CEIBA’s Gonzalez said. “It’s the right thing to do. They also need to pay their taxes, if they want to buy a house or send a child to college.
“But anyone who is going to pay the BIRT for the first time is going to need a city business license. And for that, they have to pay any outstanding tickets and bills. And that can be a lot to resolve all at once.”
His group and others have held online and remote workshops to advise drivers, independent home-health aides, and other first-time BIRT payers.
Gonzalez predicted “a rude awakening for Philadelphians” as the tax fits in. “Our economy is built on a lot of this gig work, and we’d hate to see people punished for making more money for their families.
“And this puts people in Philadelphia at a disadvantage. In a year we are celebrating the 250th year of the American Revolution that started with unfair tax concerns, we need to find a better way.”
Small, of Fiduciary Trust, said the Philadelphians he advises tend to complain without leaving the city. “Folks kind of suck it up, and say, ‘It’s not as bad as it could be.”
Still, many people have noticed how the city and state also offer incentives to bring in new businesses that aren’t given to regular taxpayers, he said. “The small guy gets the higher burden, while larger ones who have more ability to pay, pay less.”