Grace Period To Comply With PA Nonemployee Income Tax Withholding Nears End

Author:Ms Mary Hevener, Cosimo A. Zavaglia and Randall C. McGeorge
Profession:Morgan Lewis

Businesses and nonprofits operating in Pennsylvania that hire independent contractors or corporate directors who live outside of Pennsylvania, or that pay rent on Pennsylvania property to landlords living outside of Pennsylvania, must carefully consider new Pennsylvania withholding rules that will be enforced beginning on July 1, 2018. 

In October 2017, Pennsylvania enacted a statute1 substantially expanding income tax withholding beyond employee wages to require withholding of Pennsylvania income tax—at the applicable income tax rate (currently 3.07%)—from compensation exceeding $5,000 annually paid to any independent contractor or corporate director who is not a Pennsylvania resident but who performs services in Pennsylvania. The new withholding rules also apply to “disregarded entities”2 with a nonresident owner who performs services in Pennsylvania (which apparently will require payors to obtain information from such payees as to whether their owners are nonresidents). Finally, the new rules apply to any rent payments exceeding $5,000 annually paid to nonresident landlords for the lease of Pennsylvania property.

These requirements became effective on January 1, 2018. However, the Pennsylvania Department of Revenue (PA DOR) decided that any income subject to these new withholding provisions would not be subject to an underwithholding assessment if a payor fails to withhold for a period ending prior to July 1, 20183—effectively delaying the enforcement date until July 1, 2018.

Potential for Invalidation, Further Delay

Currently, there is a constitutional challenge to Pennsylvania's Act 43 of 2017 in Commonwealth Court that has the potential to invalidate the new withholding requirements, change the effective date of the new withholding rules, or further delay their enforcement date.4 In addition, the Pennsylvania Institute of Certified Accountants has requested that the PA DOR delay the withholding obligations' effective date until January 1, 2019. And on May 7, Rep. Keith J. Greiner (R) introduced a bill in the Pennsylvania General Assembly (HB 2413), which aims to streamline and clarify many issues with the new requirements, including how to determine nonemployer withholding on payments to payees that relate to business engaged within and outside of the commonwealth.

If the enforcement date is not delayed, this expansion of Pennsylvania income tax withholding requirements to nonemployee compensation and leases of Pennsylvania real...

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