Authored by Ilya Lipin and Frank Czekay
Beginning Jan. 1, 2018, Act 43 of 2017 requires Pennsylvania businesses and not-for-profits to withhold Pennsylvania Personal Income Tax at a rate of 3.07 percent from non-employee compensation paid to nonresident individuals and to single-member LLCs that have a nonresident owner if the payor is required to file a Form 1099-MISC with the Department of Revenue and if the amount paid is $5,000 or more in a year. Non-employee compensation consists of a payment to someone who is not your employee, e.g., an independent contractor, and for services in the course of your trade or business.
The withholding applies to Pennsylvania-sourced income, i.e., to services that were rendered within Pennsylvania. Compensation for nonresident’s personal services performed outside of Pennsylvania is not taxable even if the payment is made from a point within the Commonwealth or if the employer is a resident individual, partnership or corporation.
Mandatory for payments made over $5,000 annually, the withholding is optional if the amount of payments total less than $5,000 each year. However, a circumstance could arise where a nonresident independent contractor is paid throughout the year, and it is uncertain whether the last payment would exceed the $5,000 annual threshold. To avoid potential interest and penalties associated with noncompliance, the DOR encourages businesses and not-for-profit entities to withhold and remit income tax from all nonresident payments if there is any uncertainty about whether or not the $5,000 threshold will be met on the annual basis.
The withholding requirements do not apply to payments made to the United States or Pennsylvania governments.
Unregistered payors subject to the withholding requirement must apply for 1099-MISC withholding account with the Pennsylvania Department of Revenue by completing a PA-100 Pennsylvania Enterprise Registration Form. Payors that already have a withholding account register only if such payor wants to report the 1099-MISC separately.
For 2018, the 1099-MISC withholding remittance must be done on a quarterly basis. These withholding returns are due on the last day of April, July, October and January, for calendar quarters ending the last day in March, June, September and December, respectively. However, for 2019, the payors must pay to the DOR the taxes withheld based on the amount the payor expects to withhold during a calendar year. Specifically, remittances are accelerated if total withholding exceeds dollar thresholds as follows:
- Quarterly: Under $300, the taxes are due on the last day of April, July, October and January
- Monthly: $300 to $999 per quarter, the taxes are due the 15th day of the following month
- Semi-monthly: $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: If total withholding is $5,000 or greater per quarter
The submission of 1099-MISC, filing of the return and remittance of the withholding tax is done electronically through the department’s e-TIDES system. The annual withholding reconciliation statement (REV-1667) and 1099-MISC forms must be filed with the DOR by Jan. 31 of the following year. Payors are also required to provide a copy to the nonresident individual or to single-member LLCs that have a nonresident owner by Jan. 31 of the following tax year.
On Feb. 5, 2018, in a letter to the Pennsylvania Institute of Pennsylvania Public Accountants, the Pennsylvania Secretary of Revenue announced that due to legitimate concerns about the timing and implementation of the withholding requirements, “[t]he 1099-MISC income subject to withholding provisions of Act 43 of 2017 will not be subject to assessment for a failure to withhold for a period ending prior to July 1, 2018.” However, when tax is withheld, even if the tax is for the period prior to July 1, 2018, it must be filed and remitted as required by Act 43.
Reciprocity with other states
Since Pennsylvania reciprocity agreements (Indiana, Maryland, New Jersey, Ohio and West Virginia) apply only to W-2 based employee compensation, Pennsylvania-sourced income reported on 1099-MISC is always taxable for Pennsylvania personal income tax purposes.
In addition, Act 43 includes a requirement that Pennsylvania Personal Income Tax needs to be withheld from payments to nonresident lessors in connection with leases of nonresident real estate located in the Commonwealth. The same $5,000 threshold and compliance obligation apply as with the withholding requirement for nonemployee compensation. Payments made to an agent with a Pennsylvania address on behalf of nonresident landlords are not exempt from the withholding requirements.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.