Pennsylvania’s tax code underwent several changes in November 2017, when Governor Tom Wolf signed Act 43 into law. One of the most significant results of that legislation was the creation of a new withholding obligation for Pennsylvania companies that pay non-resident vendors or subcontractors.
Since issuing a bulletin on this topic last month, the PA Department of Revenue (DOR) received many questions regarding the timing and implementation for this 1099-MISC withholding requirement for tax year 2018. On February 5, 2018, the DOR announced that companies that fail to withhold this tax before July 1 will not be subject to fines and penalties. Any company that does withhold tax on 1099-MISC non-resident income, however, must file and remit it according to Act 43.
To assist clients with compliance, RKL’s State and Local Tax team assembled a quick primer on these new regulations.
Withhold PA Income Tax from Non-Resident Compensation or Business Income
PA-based companies that pay non-employee compensation or business income of $5,000 or above to a non-PA resident or disregarded entity with nonresident members (such as a limited liability company treated as a disregarded entity for federal purposes) must now file a 1099-MISC with DOR and withhold PA income tax (3.07%) from such payments. For amounts under $5,000, this withholding and filing is optional but recommended.
DOR defines non-employee compensation as any payment made to someone who is not an employee and payments made for services in the course of trade or business.
Withhold PA Income Tax from Certain Lease Payments
Individuals who make lease payments of $5,000 or more on Pennsylvania real estate in the course of trade or business to non-resident lessors must now withhold Pennsylvania income tax (3.07%) from the payment amount. For amounts under $5,000, this withholding and filing is optional but recommended.
For the purposes of Act 43, DOR defines lessor only as individuals, estates and trusts, and characterizes lease payments as rents, royalties, bonus payments, damage rents and other payments made pursuant to a lease.
Lessees must provide both DOR and the non-resident lessor with a copy of Form 1099-MISC demonstrating both the amount of lease payments and the amount withheld from them. Lessors must then also file a copy of any Forms 1099-MISC with their Pennsylvania tax returns.
1099-MISC PA Filing Requirements and Schedules
The DOR stated in its February 5 announcement that it expects payors and lessors to file the related 1099-MISC forms, with boxes 16 and 17 completed, timely in January 2019. DOR recommends that 1099-MISC withholding returns and monies be remitted and filed electronically via the e-TIDES system.
It also requires that payors and lessees adhere to the following schedules according to total withholding amount.
- Quarterly schedule: If total withholding is under $300 per quarter, the taxes are due the last day of April, July, October and January.
- Monthly schedule: If total withholding is $300 to $999 per quarter, the taxes are due the 15th day of the following month.
- Semi-monthly schedule: If total withholding is $1,000 to $4,999.99 per quarter, the taxes are due within three banking days of the close of the semi-monthly period.
- Semi-weekly schedule: If total withholding is $5,000 or greater per quarter ($20,000 per year), taxes are due on a semi-weekly basis. For employers with payrolls falling on Wednesday, Thursday or Friday, the remittance is due the following Wednesday after that payday. For employers with payroll on a Saturday, Sunday, Monday or Tuesday, the remittance is due the following Friday after that payday.
In addition to the above thresholds and schedules, DOR also requires payors to file quarterly reconciliation returns and an annual withholding reconciliation statement (REV-1667 R) with the 1099-MISC statements for each payee.