Pennsylvania Enacts New Tax Withholding and Reporting Requirements on certain non-Employee Compensation and Pennsylvania Real Estate Lease Payments for the 2018 Tax Year

Beginning January 1, 2018, Pennsylvania enacted withholding rules requiring taxpayers (1) paying non-employee compensation for services rendered in Pennsylvania and (2) lessees of Pennsylvania real estate, making lease payments to Pennsylvania non-resident individuals, estates, and trusts, to withhold Pennsylvania tax at Pennsylvania’s maximum personal income tax rate, which is currently 3.07%.  The law also expands requirements for when a copy of Federal Form 1099-MISC is required to be filed with the Pennsylvania Department of Revenue. 

Non- Employee Compensation and Business Income

For payments made on or after January 1, 2018, Pennsylvania requires withholding at a 3.07% tax rate, Pennsylvania’s current maximum personal income tax rate, on payments of Pennsylvania source compensation made to someone who (1) is not your employee and (2) is providing services to you during your trade or business.  

Certain Lease Payments

As with non-employee compensation, Pennsylvania now requires that a lessee of Pennsylvania real estate making lease payments in the course of a trade or business to a Pennsylvania non-resident lessor also withhold tax at Pennsylvania’s maximum personal income tax rate.  For this purpose, the term “lease payment” includes, but is not limited to, rents, royalties, bonus payments, damage rents and other payments made pursuant to a lease.  Significantly, based on guidance issued by the State of Pennsylvania, for this purpose the term “lessor” is limited to individuals, estates and trusts.

Limitations on Withholding Requirement

Withholding is required when subject payments are expected to be $5,000 or more during the calendar year and is optional when the subject payments are less than $5,000 annually.  However, the Department of Revenue encourages taxpayers to withhold and remit tax when the taxpayer is unsure of the total amount of payments that will be made to a non-resident payee/lessor during the year.  Also note that governmental payors, including Pennsylvania’s State System of Higher Education and its institutions, are exempt from the above withholding requirements.

Taxpayers required to withhold tax due to the above legislative change must apply for a Pennsylvania 1099-MISC withholding account by completing form PA-100, Pennsylvania Enterprise Registration.  Tax is required to be remitted periodically based on the amount of the withholding (similar to Pennsylvania’s employer withholding rules).   Annually, the taxpayer must file Form REV-1667, Annual Withholding Statement, with the Pennsylvania Department of Revenue (“DOR”) by January 31 of the following tax year.  Similarly, taxpayers must file a copy of the Federal Form 1099-MISC with the DOR and provide a copy of such form to the taxpayer from whom tax was withheld.

The enactment of withholding rules on payments by Pennsylvania taxpayers makes sense from a tax policy perspective.  This type of policy should ensure that taxpayers who are required to file Pennsylvania tax returns file the required return.  Also, Pennsylvania is not alone as California has similar withholding rules.  The challenge becomes the administrative burden placed on taxpayers to comply with these rules, especially as other states adopt similar provisions.  Taxpayers should ensure that they understand and comply with these new provisions and identify if any other states where they are doing business in have similar rules.

For more information, please contact Harry Golematis, Director, State and Local Tax Services at harry.golematis@cohnreznick.com or 973-364-7891.