By Cheri H. Freeh, CPA | Hutchinson, Gillahan & Freeh PC

It may not be widely known, but businesses may now have some additional Pennsylvania income tax withholding requirements of which you need to be aware.

On Oct. 30, 2017, Gov. Tom Wolf signed Act 43 of 2017. The new law makes several changes that are expected to generate revenue to fund the 2017-2018 budget and future budgets. Included is a tax withholding provision that previously did not exist, and it is creating some administrative issues affecting businesses in Pennsylvania.

Act 43 requires anyone who pays nonemployee compensation and business income to nonresident individuals (or a disregarded entity that has a nonresident member) and is required to file a federal Form 1099-MISC with the Pennsylvania Department of Revenue (DOR), to withhold Pennsylvania income tax from payments made. Withholding is optional when the amount paid is less than $5,000 annually.

The withholding provision also applies to lease or rental payments made in the course of a trade or business to a nonresident lessor who is paid $5,000 or more annually. Lease payments include rents or any payments pursuant to a lease and royalties.

The result of this provision is that an additional burden has been placed on businesses in Pennsylvania. Because of the complexity, the Department of Revenue has agreed to postpone assessing penalties for noncompliance until July 1, 2018. However, it’s important to begin preparing for this implementation, so let’s look at what you need to do to comply.

Payors that withhold from a payee are required to do the following:

• Payors must apply for a 1099-MISC withholding account by completing a PA-100 PA Registration form. The DOR has advised that, as of Jan. 8, 2018, the PA-100 has been updated to allow application for a 1099-MISC withholding account.
• Payors must initially file quarterly returns and an annual reconciliation using the e-TIDES system. Once the 1099-MISC withholding account is established with Pennsylvania, it will require quarterly remittance. Subsequently, it will be reviewed annually to determine the filing frequency required, which is based on taxes withheld (similar to employer filing frequencies). If a payor already has an employer account established, this account may be used; however, the DOR recommends setting up a separate 1099-MISC account to avoid confusion.
• Payments of $1,000 or more must be made electronically through the e-TIDES system.
• Taxes withheld are considered trust fund taxes, and business owners are subject to the same liabilities to collect and remit as employers.

In practice, one difficulty we expect to see is a situation where there has been no expectation that the payee would receive $5,000 or more, and at the end of the year it is discovered that the payments made to a qualifying recipient exceed $5,000 and tax should have been withheld. The only advice the DOR has offered is when in doubt, withhold and remit.

On Dec. 14, 2017, the DOR issued Informational Notice: Personal Income Tax 2017-01 to provide additional guidance. They also posted a fact sheet to their website to supplement the information provided in the Informational Notice.

Try to keep all this in mind, and stay tuned to the issue. There have been rumors that legislation is being drafted to repeal the new requirement, but the amount of political support is unknown. Members of the PICPA State Taxation Committee are working to provide input on any potential improvements to the law or the administration of the law.

Cheri H. Freeh, CPA, is a partner with Hutchinson, Gillahan & Freeh PC in Quakertown, Pa., and a member of the PICPA State and Local Taxation and CPA Image Enhancement committees, and frequently provides testimony to legislators on state and tax issues.