The thresholds, year by year
The surtax applies to Massachusetts taxable income above an inflation-adjusted threshold. The Department of Revenue has published these figures:
| Tax year | Threshold |
|---|---|
| 2023 | $1,000,000 |
| 2024 | $1,053,750 |
| 2025 | $1,083,150 |
| 2026 | $1,107,750 |
The threshold is per return, not per person. A married couple filing jointly has one threshold, not two.
How business income reaches the surtax
An S corporation's income generally passes through to its shareholders. The corporation itself owes the $456 Massachusetts minimum excise, and only pays an entity-level tax on income once its total receipts reach $6 million. A sole proprietor or single-member LLC owner reports profit on Schedule C with Form 1. Either way, the profit becomes part of the owner's Massachusetts taxable income, and it is that combined figure that is measured against the threshold.
The surtax is 4% of Massachusetts taxable income above the threshold, and the statute combines the different parts of taxable income when measuring it. A loss in one part does not offset income in another part for this purpose (M.G.L. c. 62, § 4(d)). That matters for an owner who has, say, a large capital gain in the same year as a business loss.
Married couples get one threshold
Starting with tax year 2024, the Department of Revenue says married couples who file jointly for federal purposes must also file jointly in Massachusetts unless an exception applies. There is no surtax exception to that rule. So two spouses who each have a substantial income, one from an S corporation and one from wages for example, are measured together against a single $1,107,750 threshold for 2026.
This is one of the more common surprises. Neither spouse's own income looks close to $1 million, but the joint return is.
The years most likely to trigger it
For most owner-operated businesses the surtax is a one-year event rather than an annual one. The situations that tend to push an owner over the line are predictable in advance, which is the point of looking at them early:
- Selling the business, whether as a stock sale or an asset sale
- Selling a building or land the owner or the business holds
- An unusually large contract, settlement or one-time fee landing in a single year
- A spouse's bonus, equity vesting or large gain in the same year as a strong business year
- Short-term capital gains, which Massachusetts taxes at 8.5% and which still count toward the surtax base
The timing of a sale is usually a legal and commercial decision first. The tax question is whether anything about the timing or structure can be planned before the agreement is signed, not after.
Where the PTE excises fit
Massachusetts has two elective pass-through entity excises. The chapter 63D excise is 5% of qualified income, and owners receive a credit for 90% of their share. The Department of Revenue's surtax guidance explains that a PTE cannot elect a 9% rate under 63D to cover the surtax, because the 63D rate is set at 5% by statute. That answer was written about 63D and remains accurate for it.
Chapter 101 of the Acts of 2026 then added a separate excise, chapter 63E, for tax years beginning on or after 1 January 2026. It is 4% of each qualified member's share of distributive income above the surtax threshold, again with a 90% credit to the member. In effect, it lets an S corporation or partnership pay the surtax-level tax at the entity level, where the federal SALT cap does not limit the deduction. Both excises switch off in any year the federal SALT cap is not in effect.
63E practicalities for a sale year
- The election is annual, made on the timely filed original Form 355S and confirmed on Form 63-ELT, and it is irrevocable for the year.
- It binds every qualified member, so co-owners below the threshold are part of the decision.
- Estimated payments are required if the entity's required annual payment is $400 or more, even though the election is made only when the return is filed.
- For tax year 2026 only, the Department of Revenue will waive underpayment penalties for the first two quarters if the entity elects 63E.
- Members subject to the surtax must file their own Massachusetts return to claim the 63E credit; it cannot be claimed on a nonresident composite return.
- A sole proprietorship or disregarded single-member LLC cannot elect either excise.
An illustrative calculation
The numbers below are illustrative and simplified, for a married couple filing jointly for tax year 2026 whose Massachusetts taxable income includes a one-time gain.
| Step | Amount |
|---|---|
| Massachusetts taxable income on the joint return | $1,307,750 |
| Surtax threshold for 2026 | $1,107,750 |
| Income above the threshold | $200,000 |
| 4% surtax on the excess | $8,000 |
This is on top of the regular Massachusetts income tax. How the 63E excise and credit would interact with a particular sale depends on how much of the income is the owner's distributive share from an electing entity, so it has to be modeled with real figures.
Estimates and withholding in a surtax year
A surtax year also changes what should be paid during the year. Massachusetts generally expects individuals to pay at least 80% of the year's liability through withholding or estimated payments if the tax not covered by withholding will be more than $400, and it has no safe harbor for first-year filers. The Department of Revenue notes that employers must take the surtax into account when computing wage withholding.
For an owner, the practical risk is that a gain arrives late in the year and the January estimate is the first time anyone notices. The time to look at it is while the terms of the transaction are still being settled.
Questions to bring before a big year
- What is the expected Massachusetts taxable income for the year, including a spouse's income on a joint return?
- Is any part of it a one-time item whose timing can still move?
- Is the income coming through an S corporation or partnership that could elect 63E, or through a sole proprietorship that cannot?
- Would all co-owners agree to an election that binds them?
- How will estimated payments be funded before the sale proceeds arrive?
Where we come in
We prepare the owner's return and the S corporation's return, which is where the surtax and any PTE election actually show up, and we can go through a planned sale year with your actual figures while there is still time to plan. We give you a scope and a price in writing before anything starts.
Figures on this page were checked against the IRS and Massachusetts sources listed alongside on 28 Sep 2026. They change — confirm the current amount before relying on one.
General information for owner-led businesses, not advice for your specific situation. Tax and accounting rules change, and how they apply depends on facts particular to your business. Talk to us — or to another qualified professional — before acting on anything here.
