Pennsylvania has made some noteworthy changes to the withholding obligations of payors of nonemployee compensation and lessees as they relate to payments made to nonresidents. There have also been changes made to Form 1099-MISC filing requirements. Below is a synopsis of the new requirements. It’s important to note that while the requirements became effective January 1, 2018, the Pennsylvania Department of Revenue has issued guidance indicating that it will not issue assessments for failure to withhold for periods prior to July 1, 2018.
Income Tax Withholding for Nonemployee Compensation Paid to Nonresidents
A payor of nonemployee compensation — such as when a company pays an independent contractor, consultant, freelancer, or other independent worker or pays commissions to a nonemployee salesperson — is required to deduct and withhold Pennsylvania personal income tax (currently 3.07%) from payments of Pennsylvania-source income when:
- The payee is a nonresident individual or a disregarded entity that has a nonresident member;
- The payor is required to file form 1099-MISC with the Department of Revenue; and
- The payments will exceed $5,000 annually.
For purposes of this requirement, Pennsylvania-source income includes compensation and net profits from the operation of a business.
To err on the side of caution, the Department of Revenue encourages payors to withhold and remit income taxes if they are unsure whether the annual payments will exceed the $5,000 threshold. Payors have the option, at their discretion, to withhold on payments that do not meet the $5,000 threshold.
Payors that fail to comply are liable for the taxes not withheld in the same manner as employers withholding employee compensation.
If you are a payor, determine whether or not you make payments to nonresidents that may be subject to withholding. If so, the next step is to identify payments that were made beginning January 1, 2018, in which taxes were not withheld and determine if additional withholding payments may be required.
Withholding on Lease Payments of Commercial Real Estate
Effective January 1, 2018, a lessee is required to deduct and withhold Pennsylvania personal income tax (currently 3.07%) from lease payments on Pennsylvania real estate made to lessors when:
- The lease payments are made in the course of a trade or business, e.g., commercial;
- The lessor is a nonresident individual, estate or trust; and
- The lease payments will exceed $5,000 annually.
As with the withholding requirement on nonemployee compensation, the Department of Revenue encourages lessees to withhold and remit income taxes if the lessee is unsure whether the annual payments will exceed the $5,000 threshold. Lessees have the option, at their discretion, to withhold on payments that do not meet the $5,000 threshold.
Lessees that that fail to withhold are liable for the taxes not withheld in the same manner as employers withholding employee compensation.
If you are a lessee, determine whether or not you make commercial lease payments on Pennsylvania real estate to a nonresident lessor. The next step is to identify payments that were made beginning January 1, 2018, in which taxes were not withheld and determine if additional withholding payments may be required.
Registration, Filing and Payments of 1099-MISC Withholding
To comply with the new withholding rules for payors and lessees, if you currently have an employer withholding account and do not want to separately report 1099-MISC withholding, you may use your existing employer withholding account.
However, if you want to separately report the 1099-MISC withholding, or if do not have a 1099-MISC withholding account, you will need to register online at the PA-100 Pennsylvania Enterprise Registration. The hard copy of the PA-100 has not been updated to include the 1099-MISC withholding account information.
New 1099-MISC withholding accounts will be established as quarterly filers. The filing frequency may be changed during the Department’s annual review process. Payors and lessees required to file and pay employer withholding electronically also will be required to file and pay 1099-MISC withholding electronically.
New Form 1099-MISC Filing Requirements
Also effective for tax year 2018, taxpayers that pay Pennsylvania-source income to residents or nonresident individuals, partnerships or single member limited liability company and are required to file a 1099-MISC with the federal government are also required to file a copy of the 1099-MISC with the Pennsylvania Department of Revenue.
Form 1099-MISC filed with the Department of Revenue should reflect information related to state income and state tax withheld. A copy of the 1099-MISC filed with the Department of Revenue must also be provided to the payee.
One of the toughest issues with the new withholding requirements will likely be identifying who is a nonresident. Consult with your tax team if you have tax obligations in Pennsylvania and need assistance with any of the new provisions.
Please contact a member of your service team, Sara Britt at firstname.lastname@example.org or Hannah Prengler at email@example.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.