| On December 14, 2017, the Pennsylvania Department of Revenue (“PADOR”) released an informational notice regarding the Withholding on Non-Employee Compensation and Business Income paid to individuals and unincorporated business that are non-residents of Pennsylvania. A link to the entire notice is here.
This is a significant change and if you have a business operating in Pennsylvania and if you pay 1099 Contractors organized outside of Pennsylvania, then your business will need to take immediate action. We’ve summarized the important take-aways below. Please contact us directly if you need our assistance in preparing to comply with this new withholding tax requirement.
Beginning January 1, 2018, Pennsylvania businesses that:
- Pay 1099 Contractors, Non-employee compensation, or business income to non-resident individuals or non-resident unincorporated businesses, and
- Are required to file Federal Form 1099-MISC
Are now required to withhold 3.07% in Pennsylvania income taxes from those payments. To be clear, the tax withholding requirement applies when your Pennsylvania based business is paying 1099-MISC Contractors that are organized outside of Pennsylvania.
Further, if the payee is not required to receive a Federal Form 1099-MISC, then the tax withholding requirement would not apply. An example of this would be if the payee were a “C” or “S” Corporation that is not required to have a 1099-MISC form issued to them.
Such tax withholding is optional only if such payments to a particular payee are less than $5,000 annually. If you are unsure of the total amount that will be paid during the year, the PADOR encourages businesses to withhold and remit the income tax from all payments to the payee(s).
We’re sure that you’ll be shocked to learn that governmental payors are exempt from this requirement. Visions of “All animals are equal, but some animals are more equal than others” dance in our heads as we digest the new regulation.
Generally, a payment is considered “non-employee compensation” if it is made:
- To an unincorporated business (partnership, LLC organized as a partnership, or single-member LLC) or an individual who is not your employee; and
- To pay for services rendered in the course of your trade or business.
Vendors, 1099 Contractors, and other payees that reside or are organized outside of Pennsylvania and are required to receive a Federal Form 1099-MISC must have the total PA state income tax withheld from them reported on their 1099-MISC. These recipients will be required to file a copy of the 1099-MISC form with a Pennsylvania tax return.
Businesses that withhold these taxes from a payee are required to:
- Apply for a 1099-MISC withholding account by completing a PA-100 Pennsylvania Enterprise Registration Form electronically at: www.pa100.state.pa.us
- Electronically file quarterly withholding returns and annual reconciliations via e-TIDES;
- Electronically remit the tax withholdings via e-TIDES;
Businesses that pay non-resident individuals or non-resident unincorporated entities required to receive a Federal Form 1099-MISC are liable for:
- Withheld taxes – in the same manner as employers withholding employee compensation; and
- Withholding taxes that should have been withheld but were NOT withheld from applicable payees.
Accordingly, we strongly recommend that you get a handle on this as soon as possible. If you fail to collect the withholding taxes from non-resident individuals or non-resident entities, the PADOR is telling you that your business will be liable to pay the taxes that were not collected from your subcontractors. Don’t make your subcontractor’s reluctance to provide you with information your problem.
We say again, contact us directly if you need our assistance in preparing to comply with this new withholding tax requirement.