state – Pritchard, Bieler, Gruver & Willison, P.C.
Business Consultants & Certified Public Accountants

PA Makes Big Changes to Form 1099-MISC

Alyssa Giulianelli, CPA, MBA

In Pennsylvania, Form 1099-MISC reporting is no longer a task to think about only at year-end.  Starting in 2018, some non-employee compensation and rental payments that your organization reports on Form 1099-MISC requires PA tax withholding and regular return filings.  Read on for what you may need to do now—not at year end—to be compliant and avoid penalties and interest.

Pennsylvania withholding is now required on payments of $5,000 or more paid annually as:

1)      PA source non-employee compensation or business income paid to a non-PA resident individual or disregarded entity (e.g., LLC) that has a nonresident member

2)      Lease payments made in the course of a trade or business to a non-PA resident lessor who is an individual, a trust, or an estate by a lessee of PA real estate.

Lease payments include rents, royalties, bonus payments, damage rents, and other payments made pursuant to a lease and is reported in Box 1 of Form 1099-MISC.  Non-employee compensation are those payments that you have been reporting in Box 7 of Form 1099-MISC, such as payments to independent contractors and other payments made to individuals for services in the course of your trade or business.  Tax is to be withheld at the rate of 3.07%.  The state tax withheld will be added to box 16 when you file your 1099-MISC returns in January 2019, and your state withholding tax ID will be added to box 17.

If you participate in either of these two activities and you don’t already have a PA employer withholding account, you will need to complete the PA-100 (PA Enterprise Registration) at www.pa100.state.pa.us.  If you already have a PA employer withholding account, which you use to file your employee withholding tax payments and reports, you can use the same account number for your 1099 withholding.  If you wish to keep the two accounts separate you can do so by completing the PA-100 for an additional account.  The employer withholding/1099-MISC (e-TIDES) account is needed before you can start sending the Commonwealth payments for the tax withheld or filing reports.

Tax payments are made through the e-TIDES system similar to employer withholding, on a semi-weekly, semi-monthly, monthly, or quarterly basis, depending on the amount of your total tax withholding.  For new withholding accounts, payments made the first year will be remitted on a quarterly basis (due the last day of April, July, October, and January for the immediately preceding three months, respectively).  Thereafter, if the annual 1099 withholding tax is over $20,000 per year ($5,000 per quarter), you will remit taxes on a semi-weekly basis.  For withholding totaling $3,999 – $19,999 annually, you will be a semi-monthly filer; $1,200 – $3,999, a monthly filer; and less than $1,200, a quarterly filer.  If you wish to remit your 1099-MISC withholding along with your employee withholding, under one account, then your deposit frequency will follow the same schedule as your payroll.

PA Department of Revenue just released information this week that they will not assess penalties and interest for an entity’s failure to withhold the 3.07% tax on payments made through June 30, 2018.  However, if the tax is withheld from payments prior to June 30th, you must remit payments timely according to the quarterly schedule, or face penalties and interest.  All payments that fall under Act 43 of 2017 provisions made on or after July 1, 2018 must follow withholding requirements noted in this article.  Therefore, it’s important that you have your PA withholding account set up and ready for payments well before the October 31, 2018 filing deadline (or earlier if you withhold earlier).

As an example, if you plan to pay an independent contractor, who is a New Jersey resident, $5,000 within the year for repairs and cleaning of your PA office, your payments will gross $5,000 but will include $153.50 of PA tax withholding.  Therefore the net payment would be $4,846.50.  It’s important to note that tax reciprocity does not apply to 1099 payments; tax reciprocity applies only to W-2 based employee compensation. Taking the Commonwealth’s July 1st revised deadline into consideration, please remember that payments made to vendors from January 1 through June 30 still count towards the $5,000 threshold.

If you haven’t been doing it already, we strongly suggest that you make it company policy that no company disbursements be made without first getting a completed and signed Form W-9 from your vendors.  As soon as you contract with a vendor, have them complete this form before you begin business with them.  Enter the recipients tax ID into your bookkeeping system and keep W-9s on file.  Form W-9 is available at https://www.irs.gov/pub/irs-pdf/fw9.pdf.  Pennsylvania does not have their own version of the W-9 form.

If you have questions about this new tax requirement or need help completing a PA-100, please contact your accountant at PBGW.