What a contribution saves in Pennsylvania
The table shows three owners, each making the largest first-year contribution their age and income allow. Pennsylvania's top rate is 3.07%, and how much a contribution saves depends on which brackets it comes out of.
| Owner | Contribution | Federal | Pennsylvania | Total |
|---|---|---|---|---|
| Sole proprietor, 45, $250,000 profit, single | $156,000 | $32,700 | Not deductible | $32,700 |
| S corporation, 52, $250,000 salary and $250,000 profit, married | $223,000 | $50,800 | $6,800 | $57,700 |
| Sole proprietor, 58, $600,000 profit, married | $282,000 | $93,000 | Not deductible | $93,000 |
Savings are lower than the contribution times your top rate because a large contribution reaches down into lower brackets, and because for many owners it also reduces the 20% qualified business income deduction. Your own figures depend on your income, filing status and other deductions. The estimate works them out for you.
How Pennsylvania treats the deduction
Pennsylvania is one of three states, with the others listed in states that tax retirement contributions, that do not follow the federal deduction for a self-employed owner's contributions. The notes below explain what that means and how an S corporation differs.
Pennsylvania taxes a self-employed owner's contributions
Pennsylvania does not follow the federal deduction for retirement contributions made by a self-employed person or by a partnership for a partner. The Department of Revenue's guide says such contributions are included in the owner's income and are not deductible as a business expense. A sole proprietor or partner in Pennsylvania saves federal income tax only.
Owners of an S corporation are treated differently: a contribution made by the corporation for its employee-owner is generally not taxed to the employee. We have not confirmed how Pennsylvania treats the deduction at the entity level, so the S corporation example above assumes it is deductible. Ask your tax adviser before relying on it.
Pennsylvania generally does not tax retirement distributions once you reach retirement age, which recovers part of what was paid going in.
Philadelphia's wage tax is not reduced by plan contributions, and its net profits tax is believed not to be either.
If you retire somewhere else
Money in a cash balance plan is taxed when it comes out, not when it goes in. Federal law stops a state from taxing retirement income paid from a qualified plan to someone who no longer lives there (4 U.S.C. 114). So the state you live in when you take the money out is the one that can tax it.
Where you expect to live in retirement is worth factoring in when you compare a contribution now with tax later.
Deadlines are federal
The dates that matter are the same in every state: the plan can be adopted for 2026 up to your business's extended filing deadline, and corporations have to run the salary the plan counts through payroll by December 31. See cash balance plan deadlines or find your dates.