IF YOUR BUSINESS MAKES PAYMENTS TO NON-RESIDENTS OF PA

Be aware that the PA DOR has SIGNIFICANTLY changed its requirements for submission of Federal Form 1099-MISC and withholding on Pennsylvania-Source Non-Employee Compensation, Business Income and Lease Payments

Businesses that fail to comply can result in additional taxes owed to the PA DOR.

Beginning January 1, 2018, anyone that pays PA-source non-employee compensation or business income to a non-resident individual or disregarded entity that has a non-resident member and is required to file a Federal Form 1099-MISC with the DOR, such taxpayer is required to withhold from such payments an amount equal to the tax rate specified at 72 P.S. 7302 (currently, 3.07%). Withholding is optional for payors paying a payee less than $5,000 annually. If you are unsure of the total amount of payments that will be made to a payee, the DOR encourages you to withhold and remit income tax from all payments to the payee.

Failure to comply with the withholding requirement may make you liable for the amount you should have withheld, plus penalties and interest.

Non-resident withholding applies if all of the following are true:

• You are responsible for making payments of non-wage income from Pennsylvania sources (commercial leases, royalties, services rendered, etc.).

• The payment will exceed $5,000 per payee in the calendar year.

• The payment is made to a resident of another state.

Additionally,non-residents are typically:

• Individuals who do not live in Pennsylvania.

• Business entities that do not have a permanent place of business in Pennsylvania.

• Estates whose decedent was not a Pennsylvania resident at the time of their death.

• Trusts with no Pennsylvania resident settlors.

The non-resident withholding requirement does NOT apply to:

• Wages paid to employees (see reciprocity rules).

• Payments for goods and materials.

• Sales of real estate located outside of Pennsylvania.

• Residential rental agreements or residential lease payments.

Non-resident withholding is not required when:

• The payee is a corporation.

•The payee is a partnership or multi-member liability company.

•The payee is a non-resident with no PA source income.

• The payee is a disregarded entity owned by a corporation or partnership.

In general, governmental payors are exempt from this requirement. This does not include state owned and state affiliated universities in the Commonwealth.

Generally, a payment is considered non-employee compensation if it is made to: (i) someone who is not your employee; and (ii) for services in the course of your trade or business.

Payees having tax withheld who receive a copy of the Federal Form 1099-MISC from the payor are required to file a copy thereof with their PA tax return.

PA Source Income Rules

Pennsylvania personal income tax is imposed upon eight classes of income — (1) compensation, (2) net gains from the disposition of property, (3) net profits, (4) net gains from rents, royalties, patents and copyrights, (5) interest, (6) dividends, (7) estate and trust income, (8) and gambling income. PA residents are subject to tax on all eight classes of income regardless of the source of the income. Non-residents are subject to tax on the eight classes of income from PA sources.

Generally, PA source income is income derived from activity or property located in PA. Such income includes:

Income from ownership or disposition of real or personal property located in PA. For example, rental income from PA property or the sale of real estate located in PA.
Income from work performed in PA, such as personal services or business income.
Income from intangible property employed in a trade, profession, occupation or business carried on in the Commonwealth.
Gambling and lottery winnings from a wager placed in PA.

A distributive share of income from pass-through entities (partnerships and S corporations) from the above sources of income is also PA source income.

How does a payor determine the amount of income that is subject to PA withholding? When income is derived from activity or property both within and outside of PA, the income must be apportioned and allocated in a fair and equitable manner. There is no single method for apportioning and allocating income. Any apportionment and allocation methods used by a taxpayer are subject to review by the Department of Revenue.

Generally, income should be specifically apportioned and allocated based upon the location of the activity or the property that generates the income. However, if the source of the income is not readily ascertainable, other apportionment methods can be used, such as:

For services performed both in and outside PA, the income from such services may be apportioned and allocated based upon working days within and outside the Commonwealth.
If the income is based upon volume of activity, such as commissions of a salesman, the income may be apportioned based upon the volume of activity within and outside PA.
If a business does not keep specific records of the source of its income, three-factor apportionment (property, payroll and sales factors) may be used to apportion and allocate the business income.

Payors that withhold from a payee are:

Required to apply for a 1099-MISC withholding account by completing a PA-100 PA Enterprise Registration Form electronically at: www.pa100.state.pa.us;
Required to electronically file quarterly withholding returns and annual reconciliations with the DOR via e-TIDES;
Required to electronically remit the withheld monies via e-TIDES;
Liable for withheld taxes in the same manner as employers withholding employee compensation; and
Liable for taxes not withheld in the same manner as employers withholding employee compensation.

Payors are required to withhold and remit taxes based on the total dollars withheld as taxes. Payment schedules run from semi-weekly to quarterly.

Payors are also required to file reconciliation returns for each quarter and the annual withholding reconciliation statement (REV-1667 R) with the 1099-MISC statements for each payee.

TAX SAVINGS ALERT: Take protective steps and send PA Form REV-1832 (1099-MISC Withholding Exemption Certificate) to your payees to complete if your business is not liable to withhold on payments made to the payee.

TAX SAVINGS ALERT: Don’t be sorry; Be safe. If you believe that your total payments will not exceed the $5,000 threshold and do not withhold, and at the end of the year you find that you exceeded the $5,000 threshold, you are liable for the entire amount (3.07% times the total amount paid).

Similar Registration (Form 100), Electronic Reporting & Withholding Rules Apply to Certain Lease Payments

Anyone leasing PA real estate who makes a lease payment in the course of their trade or business to a non-resident lessor (includes only individuals, estates and trusts) is required to withhold from such payments an amount equal to the tax rate specified at 72 P.S. § 7302 (currently, 3.07%). Withholding is optional for lessees paying a nonresident lessor less than $5,000 annually. If you are unsure of the total amount of payments that will be made to a non-resident lessor, the DOR encourages you to withhold and remit income tax from all payments to the non-resident lessor.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

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About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.