There are new state tax withholding rules for companies operating in Pennsylvania who pay Pennsylvania-source income to out-of-state independent contractors or commercially rent Pennsylvania real estate from certain out-of-state landlords.
These rules will affect companies that use independent contractors that live outside of Pennsylvania and may include companies that use out-of-state attorneys, accountants, or any other individual to which they issue Form 1099-MISC to report income from Pennsylvania sources.
These out-of-state independent contractors are currently required to self-assess and remit Pennsylvania state income taxes of 3.07 percent to the state annually. The new rules will require Pennsylvania companies who contract with such non-employees to withhold the state income taxes on behalf of them.
This also affects any Pennsylvania-based company that commercially rents from certain out-of-state entities, required to file Form 1099-MISC. Such entities include individuals, single-member LLCs owned by an individual, and estates and trusts. The Pennsylvania company is now required to withhold the 3.07 percent state income tax on payments to these landlords.
Withholding is required even if the payments are made to a Pennsylvania intermediary. It affects not only rent payments but also any royalties, bonus payments, damage rents and other payments made pursuant to a commercial real property lease.
READ MORE: Pennsylvania Budget: Tax Changes for Online Retailers, Net Operating Loss Deductions
The new rules were passed as part of the 2017-18 state budget and are effective Jan. 1, 2018.
Companies are exempt from the new withholding rules for any individual payee whose annual compensation is less than $5,000. However, the state warns if companies are unsure if they will hit $5,000 for any payee they should withhold the taxes just in case.
The new rules are viewed as a burden on Pennsylvania companies. It places a new administrative burden on companies to execute another set of withholding and reporting requirements, and in many cases, the withholding required for many of the payees will be relatively small.
Companies are required to withhold and remit state income taxes according to the following schedule:
- Quarterly – If total withholding is under $300 per quarter, the taxes are due the last day of April, July, October and January.
- Monthly – If total withholding is $300 to $999 per quarter, the taxes are due the 15th day of the following month.
- Semi-Monthly - 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 – If total withholding is $5,000 or greater per quarter ($20,000 per year).
Companies also are required to file reconciliation returns for each quarter and the annual withholding reconciliation statement (REV-1667 R) with the federal 1099-MISC statements for each payee or landlord.
Pennsylvania companies should review their accounts payable files to determine which of their vendors/payees may fall under these new withholding rules. One likely obstacle will be determining which LLCs are multi-member and which ones are single-member. If the LLC is a single-member, then determining in which state the member lives. Obtaining an updated federal Form W-9 (Rev. November 2017) should be helpful in this process.
Companies meeting the withholding requirements are required to apply for a 1099-MISC withholding account via Form PA 100, which can be done electronically at www.pa100.state.pa.us.
The new rules are both difficult and complex. Please contact us for personal assistance or any questions you have.