Effective January 1, 2018 businesses are required to withhold Personal Income Tax on nonresident persons or single member LLCs who receive $5,000 or more annually in nonemployee compensation or net profit (income from the operation of a business, profession or other activity) for work that is Pennsylvania sourced. The rate of withholding is 3.07%. The term persons is defined as individuals, and incorporates estates and trusts. The statute defines a single member LLC as any entity that is not a C corporation. Therefore, nonresident single member S corporations would be subject to the withholdings requirements. The term Pennsylvania sourced income may not necessarily be evident and may be open to further discussion or research.
Also included in the same House Bill (542) are withholding requirements to payments made to nonresident landlords of commercial real estate located in Pennsylvania. The lessor includes only individuals, estates and trusts. The mandatory withholding for rent is $5,000 or more annually.
For amounts paid less than the $5,000 the withholding requirement is optional. However, businesses may want to start withholding on amounts less than $5,000 to assure that the amount of payments is large enough to cover the tax once the threshold is met.
These new rules will require quarterly withholding returns due April, July, October and January. In addition, a withholding statement will need to be issued to the payee on Form 1099-Misc. If late, the payor will be subject to late filing penalties. The payment requirements will be the same as those used for employee withholdings. Therefore, payors and lessors may need to complete or change Form PA-100, Pennsylvania Enterprise Registration Form to apply for withholding. Some filers may be required to file electronically.
These new rules may cause many practical and legal uncertainties. Please feel free to contact us to discuss any issues you may have.