Act 43 of 2017 (the Act) created a new withholding obligation at the current applicable income tax rate (3.07%) for payors of Pennsylvania source income to non-residents if the total amount of such payments is at least $5,000. (Withholding is optional for payments of less than $5,000.) The Act also expanded the requirements with respect to when a copy of Federal Form 1099-MISC must be filed with the Pennsylvania Department of Revenue (DOR).
Beginning July 1, 2018 (the Act’s effective date has been delayed from January 1, 2018), anyone who makes payments of Pennsylvania source non-employee compensation or business income to a non-resident individual or a disregarded entity that has a nonresident member is required to withhold from such payments at the applicable income tax rate. Non-employee compensation typically includes a payment if it is made to someone who is not an employee for services provided in the ordinary course of a trade or business. (This includes payments to independent contractors and non-resident directors.) For example, if a Pennsylvania business has a non-resident serving as a director, the business is required to withhold if services were rendered within Pennsylvania and it will be paying the individual more than $5,000 annually. Where the total amount of payments to be made in a year is uncertain to exceed $5,000, the DOR encourages businesses to withhold taxes from all payments made to the non-resident.
Governmental payors, including the Pennsylvania State System of Higher Education and its institutions, are exempt from the requirement of withholding on nonemployee compensation and business income. However, Pennsylvania businesses will be liable for the amount of any unpaid taxes that were not properly withheld. The DOR expects that payors will file the related 1099-MISC, with boxes 16 and 17 completed, with the department timely in January 2019.
The DOR is currently in the process of drafting guidance to address the many uncertainties in this new law. In addition, there are pending challenges to the new law that may delay the effective date of the law further. But, in any event, businesses should be prepared to withhold taxes under this law effective July 1, 2018.