On July 1, Pennsylvania will begin enforcing enhanced personal income tax withholding requirements that were enacted by the legislature as a part of Act 43 of 2017. These withholding requirements affect two classes of taxpayers: tenants who make lease payments to certain nonresident landlords and payors of Pennsylvania-source nonemployee compensation or business income to nonresidents.
Lease Payments to Nonresident Landlords
Tenants of Pennsylvania real estate who make lease payments in the course of their trade or business to a nonresident landlord who is an individual, estate or trust are required to withhold from these payments an amount equal to the Pennsylvania personal income tax rate, currently 3.07 percent. Lease payments include, but are not limited to, rents, royalties, bonus payments, damage rents and other payments pursuant to a lease, but withholding is not required for payments of less than $5,000 annually. Certain registration, electronic filing and remittance rules apply. Additional information is available at www.revenue.pa.gov and www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/
Nonemployee Compensation and Business Income
Anyone paying Pennsylvania-source nonemployee compensation or business income to a nonresident individual or disregarded entity that has a nonresident entity and is required to file a federal Form 1099-MISC is required to withhold Pennsylvania income tax at 3.07 percent from the payments. A payment is considered nonemployee compensation if it is made to someone who is not an employee for services in the course of a trade or business. Withholding is not required for payments to an individual payee of less than $5,000 annually. The registration, electronic filing and remittance rules are the same as the rules for tenants making rent payments to nonresident landlords.
Certain nonresident landlords are going to be in for a surprise when their lease payments for Pennsylvania property are 96.93 percent of what they were before July 1. We believe an ounce of prevention is worth a pound of cure, and strongly recommend an appropriately worded letter be sent by tenants to their landlords that are individuals, estates or trusts to inform them of the law change. It may also be necessary to confirm residency status for landlords. In addition, if a landlord is a disregarded entity, a tenant may need to inquire as to whether the first regarded entity is an individual, trust or estate. On a go-forward basis, lease agreements should be modified to account for these new withholding provisions; a tenant should add a provision to its lease requiring its landlord to represent what it is (individual, estate, trust, other entity) and acknowledge that withholding is required by law under certain circumstances. In addition, its landlord should agree to notify the tenant if the lease is transferred to an individual, estate or trust (and thus, the tenant would be required to begin withholding) and to indemnify the tenant for any failure to do so. The same could be said for those nonresidents receiving compensation for services — principally consultants, independent contractors and members of boards of directors.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.