Pennsylvania companies have been grappling with the application of the state’s new rules for non-resident 1099-MISC withholding. Starting with the 2018 tax year, PA-based organizations that make payments totaling more than $5,000 to non-resident vendors or business partners must withhold PA income tax. This withholding obligation also applies to lease payments of $5,000 or more per year on PA real estate to non-resident lessors.
To support taxpayers through this new obligation, which takes effect July 1, 2018, the PA Department of Revenue (DOR) recently provided some updates and resources, including a new exemption form.
Exemption Form Now Available
DOR published a new form for individuals or entities to claim exemption if a PA company tries to withhold income tax from 1099-MISC payments. Exempt status is available to:
- Individual PA residents
- The trust or estate of a PA resident
- Individuals or entities not subject to PA personal income tax, such as corporations, partnerships, multi-member limited liability companies, nonresident with no PA-source income or a disregarded entity owned by a corporation, partnership or PA resident
Click here to download the 1099-MISC withholding exemption certificate.
Applicability to Board of Director Fees and Realtor Payments
DOR predicts that a large portion of non-resident withholdings will come from Board of Director fees (for individuals not residing in PA who sit on boards located in the state) and payments by PA companies to non-resident realtors. In both of these situations, questions remain as to the calculation of the withholding and how to source the payments. DOR is currently working on more specific instructions related to the treatment of these two areas. RKL will provide additional guidance as it becomes available.
Questions about meeting $5,000 threshold? Start withholding now.
Since the creation of this withholding obligation as part of Act 43 of 2017, DOR has been fielding questions from taxpayers and practitioners related to projecting the final amount of vendor or lease payments that may trigger the collection and remittance of this tax. Many business owners with vendors that may come close but not exceed the $5,000 threshold worry about under or over-withholding.
Here’s an example to demonstrate the confusion around when and how this withholding should be applied. A business owner pays its non-resident vendor $4,500 throughout the majority of a given tax year. As the year draws to a close, however, an unexpected payment of $550 pushes the business over the $5,000 threshold, triggering the 1099-MISC withholding obligation. There is confusion as to whether the business should withhold PA income tax only on the portion that exceeded the $5,000 threshold (in this example, $50) or if the withholding must be applied retroactively back to the first payment of the year to this non-resident vendor.
For 2018 only, PA will allow for withholdings for only the portion above $5,000. Going forward, PA will expect withholdings for the full amount of payments including the first $5,000 and anything over this amount.
Due to the difficulty in projecting and managing expected payments throughout a year, DOR recommends that businesses with non-resident vendors start withholding at the beginning of the payment term if they expect to be anywhere in the vicinity of the $5,000 mark. Further clarification and instructions from DOR for such scenarios is forthcoming.
RKL’s State and Local Tax team continues to engage with DOR and members of the General Assembly to advocate for enhanced clarity around this new obligation. Contact your RKL advisor with any questions on 1099-MISC non-resident withholding.