Late last year, the state of Pennsylvania made a major announcement with regards to out-of-state sub-contractors working for Pennsylvania companies. Starting 1/1/2018, a Pennsylvania company paying an out-of-state contractor will be required to withhold the 3.07% Pennsylvania taxes on the payment. Recently Pennsylvania has changed the required date of the withholdings to commence on 7/1/2018 to avoid penalties. Let’s dive into some of the details of this new change in law:
Who is Subject to This Change?
This change affects all businesses and non-profits that expect to make payments of at least $5,000 to non-employees who are non-residents or single member LLC’s with non-resident partners. The payments have to be Pennsylvania-source payments.
The withholding also applies to lessees of Pennsylvania real estate who make payments to a non-resident lessor in the course of the lessee’s trade or business.
What is a Single Member LLC?
This refers to a Limited Liability Company that only has one owner. So if the owner is, say, a New Jersey resident, and your company contracts with the owner, then your company may be subject to the withholding requirement.
What Exactly is Non-Employee Compensation?
This refers to someone who is not your employee who provides services to your company in the course of your trade or business. In most cases, this refers to a sub-contractor.
What Type of Payments Qualify?
This is where it gets tricky. First, the new law states that anticipated payments of less than $5,000 to the non-employee (a/k/a sub-contractor) do not require withholding. If anticipated payments are expected to be over $5,000, withholding is required. So, what do you do if you expect to pay less than $5,000 but end up exceeding the threshold? The State of Pennsylvania states that it “encourages” withholding if you are unsure of what the total amount of payments will be for the year.
Also, the payments need to be for Pennsylvania-sourced income. This means that if an out-of-state based sub-contractor comes on site to perform work for your office in Pennsylvania, then then you would need to look at this arrangement as being possibly subject to the withholding requirement.
Note that the withholding requirements for non-employees do not follow the reciprocity agreements for salary withholdings that Pennsylvania has setup with various surrounding states.
Where Do I Make the Required Withholding Payments?
First things first, you must apply for a 1099-MISC withholding account by completing the PA-100 Pennsylvania Enterprise Registration. This can be done electronically via www.pa100.state.pa.us. Withholding payments can then be made electronically via Pennsylvania’s E-Tides system.
The biggest take-aways I have with the new law are that if you are Pennsylvania company making payments to out-of-state contractors, then you should think long and hard about withholding taxes regardless of the amount. Consulting with your tax advisor on this should be your #1 priority starting today to get an understanding of what payments for your specific situation would qualify for withholding to avoid any penalties. As always please feel free to contact me with questions!