The line between an independent contractor and a W-2 employee has just become a little more “blurred” in the State of Pennsylvania…a state that is infamous for difficult local tax withholdings, yet again threw a curve ball our way.
As of January 1, 2018, the Pennsylvania Department of Revenue enacted Act 43, which is a state income tax withholding obligation for employers who are paying income (sourced from Pennsylvania) to non-resident (non-employees) and/or for leases of Pennsylvania real estate.
Yep, you heard me, if you are a Pennsylvania based company paying non-resident contractors, i.e. commissioned based sales representatives or leasing real estate to a non-resident, you are obligated to withhold Pennsylvania State income tax at the current rate, which is 3.07%.
So How Do We Comply?
If you currently have W-2 employees, then you already have a Pennsylvania withholding account, all you need to do is add these contractors to your payroll and advise your payroll company that they are contractors, and you wish to withhold the Pa. state income tax.
If you rely heavily on contractors and have not hired anyone as a W-2 employee, then you will need to submit a PA-100 form, which establishes your 1099-MISC withholding account.
If you are paying more than $5,000, you will need to make sure that Box 16-18 are completed on the 1099-MISC forms that you send to your payees (contractors).
If you are paying less than $5,000 annually, you are not required to withhold but they recommend that you do.
The payee (contractor), if paid over $5,000 annually, will still be required to fill out a 1099-MISC and file it with their tax return.
How Do I Know What Frequency to Withhold?
Your frequency to remit depends on the amount that you withhold, see table below from http://www.revenue.pa.gov/GeneralTaxInformation
Following remitting schedule below:
• Semi-Weekly – If total withholding is $5,000 or greater per quarter ($20,000 per year), such payors are required to make withholding deposits on the following Wednesday for any payments made on Wednesday, Thursday or Friday; and on Friday for any payments made on Saturday, Sunday, Monday or Tuesday.
• Semi-Monthly – If total withholding is $1,000 to $4,999.99 per quarter, the taxes are due within three banking days of the close of the semi-monthly period.
• Monthly – If total withholding is $300 to $999 per quarter, the taxes are due the 15th day of the following month.
• Quarterly – If total withholding is under $300 per quarter, the taxes are due the last day of April, July, October, and January.
Employers will be required to file reconciliation returns quarterly along with submitting the annual tax withholding reconciliation (REV-1667 R) for each payee.
The burden of complying with Act 43 will fall on the shoulders of employers. To mitigate this burden we definitely recommend leveraging your payroll provider. This will save time and money as well as provide a peace of mind for compliance.
Reach out to me for further questions about Act 43 or about how PayrollMart can help with your payroll needs.