Late last year, Pennsylvania enacted Act 43 of 2017, a grab bag of tax provisions that, among other things, requires Pennsylvania businesses to withhold personal income tax (PIT) at the rate of 3.07% from certain payments reported on the Federal Form 1099-MISC to non-resident payees. The Pennsylvania Department of Revenue (DOR) postponed the original effective date of January 1 to July 1 of 2018, to put in place the necessary infrastructure to collect and credit the payments. Absent a reprieve from the Commonwealth Court, which is considering a challenge to Act 43 in its entirety, the withholding requirements are now effective. Here’s what you should know:
Payments subject to withholding. Any person engaged in a business in Pennsylvania making payments reportable on a federal Form 1099-MISC is required to withhold PIT as long as the payments are:
- to non-resident individuals (or disregarded entity owned by non-resident individuals) for Pennsylvania source non-employee compensation or services; or
- for the lease of non-residential real estate paid to a non-resident lessor who is an individual (or a disregarded entity owned by an individual).
Non-Employee Compensation. Generally, a payment is non-employee compensation if it is money paid in the course of a trade or business to a person other than an employee for the provision of services. Independent contractors and outside directors who reside out of state are subject to withholding. On the other hand, payments for goods or sales of property are not subject to the withholding requirement. It is important to note that a payment that is not reported on a 1099-MISC is not subject to withholding. Accordingly, payments to corporations or to disregarded entities that are owned by corporations are not subject to the requirement. In addition, payments to certain partnerships and professionals are reportable on a Form 1099-MISC but are not subject to withholding (e.g., medical practices and law firms that are in the form of professional corporations or partnerships receive 1099s but are not subject to the new Pennsylvania withholding requirements).
Payer liability. Persons obligated to withhold become secondarily liable for the withheld tax if they fail to withhold and remit it as required. This is the same secondary liability rule that applies to employers who are obligated to withhold and remit income taxes but fail to do so.
Reporting and Payment. Employers can use the same account that they use for wage withholding to deposit withheld amounts; other payers required to withhold must open a 1099-MISC withholding account by using the PA100 business registration form. Withholding persons are required to report quarterly and submit an annual return. Deposits of withheld amounts depend on the amount at issue, ranging from quarterly withholding if the amount is under $300 per quarter to semi-weekly if the withheld amounts are at least $5000 per quarter. (Note, withholding is optional for lessees paying less than $5,000 annually even if the landlord would otherwise be subject to withholding.) An employer who pays and reports wage withholding electronically must pay and report 1099-MISC withholding electronically through e-TIDES. Otherwise paper filings are permissible.
No reciprocity. Pennsylvania has reciprocity agreements in place with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia that allow Pennsylvania employers to withhold income tax due to the participating states where their non-resident employees reside in lieu of Pennsylvania PIT. Unfortunately, the agreements do not apply to non-wage payments. Non-resident payees are responsible for paying any taxes in their state of residence and can file a return in Pennsylvania and claim a tax credit for withheld taxes remitted to Pennsylvania.
Suggested next steps:
- The new rule puts pressure on payers to address the 1099-MISC reporting status up front, preferably by collecting a W-9 from each service providers as a condition of receiving payment. Pennsylvania also has its own 1099-MISC withholding exemption certificate. Businesses can obtain an executed form Rev-1832 in addition to the W-9 to substantiate the basis for not withholding from payments reported on a Form 1099-MISC.
- Contracts and leases should provide explicitly for withholding when required by a taxing authority to avoid any implication that the withheld tax is the obligation of the payer.
- If you use an outside service to handle your payroll, you may be able to incorporate some of your 1099 withholding and payment requirements.
For more information, read the 1099 Miscellaneous Fact Sheet here.
 See Phantom Fireworks et al. v. Wolf et al., Commonwealth Court Docket No. 21 M.D. 2018. The complaint alleges that the 2017 Tax Act violates the Pennsylvania Constitution because the General Assembly failed to follow constitutional requirements for enacting legislation. One of the requirements is that the bill has a single subject. That argument may have gotten a boost with a recent Pennsylvania Supreme Court decision, Washington et al. v. Department of Public Welfare, 50 MAP 2016 (Pa.S.Ct. 2018), that struck down a so-called “zombie bill” that was passed as a shell and later amended to include a number of different provisions eliminating cash assistance for poor state residents.