Posted By Dave Jennings, CPA and Valerie Middlebrooks CPA
We are writing to make you aware of a significant change in Pennsylvania tax law that may impact your business. The changes made are for 2018 Form 1099s which will be filed in 2019.
First, if you meet one of the parameters below, you are now required to withhold at the Pennsylvania stated tax rate, currently 3.07%. It is important to note that withholding is optional for payments totaling $5,000 or less annually, per payee.
- Anyone doing business in Pennsylvania that pays Pennsylvania sourced non-employee compensation (independent contractors) to either a non-resident individual, or a disregarded entity (single member LLC) that has a non-resident member and is required to file a Federal Form 1099-MISC.
- Anyone leasing Pennsylvania real estate who makes payments related to a trade or business to a non-resident lessor. Lessors include only individuals (including single member LLCs), estates, and trusts. Lease payments include rents, royalties, bonus payments, damage rents, and other payments made pursuant to the lease.
Payors that must withhold will also be required to:
- Apply for a Pennsylvania withholding account (Form PA 100 also available electronically),
- File electronically quarterly withholding returns and annual reconciliations, and
- Electronically remit taxes withheld.
Withholding payments are to be remitted to the Pennsylvania Department of Revenue either quarterly, monthly, semi-monthly, or semi-weekly depending on the total amount being withheld. Failure to either withhold or properly remit will subject the payor to the same penalties as Pennsylvania employers face for employee withholding.
Second, anyone that pays Pennsylvania source income (of whatever type) to a resident or a non-resident individual, partnership, or single member LLC and is required to file a Federal Form 1099-MISC with respect to such payment, is required to file a copy with the Pennsylvania Department of Revenue. Electronic filing of these forms may be required. Prior to 2018, only certain types of 1099-MISC payments were required to be filed with Pennsylvania Department of Revenue.
Unlike employee compensation, state reciprocity agreements do not apply to payments made to non-residents under this withholding requirement, thus withholding will still be required for residents of MD, NJ, WV, OH, VA, and IN.
Some payors might not realize they will reach the $5,000 threshold until it is too late to plan accordingly, so guidance issued by the Pennsylvania Department of Revenue states that if you are unsure whether payment will exceed $5,000 you are “encouraged” to withhold and remit income tax from all payments to that payee. BLS encourages you to consider this information throughout the entire year, which will give you time to be prepared to a) pay the 3.07% PA Withholding or b) limit your use of each payee to not go above the $5,000 threshold.
For additional information please refer to Pennsylvania ACT 43 of 2017 and Informational Notice Personal Income Tax 2017-01, or contact your BLS Team Member at 302.225.0600 or firstname.lastname@example.org for further assistance.