In 2017, Pennsylvania passed Act 43 which requires certain payors of PA-source income, and lessees of PA real estate to withhold taxes on payments for non-residents. The PA Department of Revenue (PA DOR) issued a fact sheet providing an overview of the new 1099-MISC withholding obligations which took effect January 1, 2018. Payors / Lessees must comply by July 1, 2018, to avoid being subjected to penalties, etc. for failure to withhold.
The fact sheet has left companies with unanswered questions; the most common questions, and their answers are listed below:
Q1: What if I don’t know the annual amount owed to a non-resident?
Payors are required to withhold 3.07% once the non-resident has met $5,000 in annual payments. Payors will not be assessed for failure to withhold before July 1, 2018. There is no clear guidance on how the PA DOR will determine penalties should payors neglect to withhold retroactively after July 1, 2018. A representative of the PA DOR anticipates additional communications elaborating in more detail come late 2018 or early 2019. Meanwhile, should one of your non-residents exceed the $5,000 annual payment, we recommend doing a retroactive withholding until more clear guidance is provided. This withholding will minimize your risk of incurring failure to withhold penalties.
Q2: What are the penalties for failure to withhold?
No guidance has been provided yet, and may not be available until late 2018 or early 2019.
Q3: How do I remit withholdings on non-resident 1099-MISC payments?
The PA Department of Revenue recommends that payors remit withholding payments electronically through e-TIDES. The withholding on 1099 payments must include the withholding on W2 wages. Pennsylvania confirmed that multiple deposits may be made for the same period end date, which may help with tracking the two different types of withholding payments (W2 vs. 1099). There is no separate area for remitting the withholding on 1099 payments.
Q4: Are there any additional filing requirements on a quarterly and/or annual basis?
Yes, payors must file an additional Annual Withholding Statement (REV-1667) for the 1099-MISC tax withholdings. The withholding amount and payments cannot be included with the REV-1667 that is filed for W2 wages.
Q5: What best practice do you recommend for reconciling wages, 1099-MISC payments, and corresponding withholding payments on quarterly and annual basis?
Outside Payroll Provider
If you have partnered with a payroll service provider, consider having them issue 1099-MISC payments and coordinating the appropriate withholdings and filings.
If you process payroll in-house, then it is critical to have a report that will show the applicable 1099-MISC payments and associated withholdings, so they can easily be totaled with W2 payments and deductions to reconcile to deposits made (according to your frequency). A spreadsheet could be used to perform a simple reconciliation on a monthly, quarterly, and annual basis.
Q6: What if I failed to withhold the appropriate taxes from 1099-MISC payments to non-residents in 2018?
The PA Department of Revenue will require the payor to make payment for the 3.07% on behalf of the recipient. The ability to abate assessed penalties, interest, etc. remains to be seen and most likely will be in unique circumstances related to individual payors.