New PA Withholding Requirement on Royalties, Bonus Payments, Rents and other Business Income

Energy & Resources|Tax Reform

By Joseph Heisler

Under Act 43 of 2017, anyone that pays Pennsylvania-source non-employee compensation or business income to a non-resident individual or disregarded entity that has a non-resident member and is required to file a Federal Form 1099-MISC with the Pennsylvania Department of Revenue (Department) is now required to withhold amounts from such payments. These payments include lease payments, such as rents, royalties, bonus payments, damage rents and other payments related to a lease.

The withholding amount is equal to the rate specified at 72 P.S. § 7302 (currently, 3.07%). The withholding is optional for payments to a payee of less than $5,000 annually. Government payors are exempt from the withholding requirement; however, state-owned and state-affiliated universities are not excluded.

When considering the reporting of working interest in oil and gas wells, the question arises of whether Pennsylvania withholding is required on the gross income from the well, as reported on the Form 1099, or the net amount paid to the individual after property taxes, gathering expenses, and other operating expenses are deducted. The law enacted by Act 43 and Informational Notice Personal Income Tax 2017-01 provide no guidance on the issue. To gain further clarification, Schneider Downs has reached out to Pennsylvania Chief Counsel and will provide an update once received.

For additional information on withholding and filing, see below.

 Payors that are required to withhold must do the following:

1. Apply for a 1099-MISC withholding account by completing a PA-100 Pennsylvania Enterprise Registration Form Electronically at: www.pa100.state.pa.us;

2. Electronically file quarterly withholding returns and annual reconciliations with the Department via e-TIDES;

3. Electronically remit the withheld monies via e-TIDES;

Payors are required to withhold and remit taxes on income according to the following schedule:

Quarterly – If total withholding is under $300 per quarter, the taxes are due the last day of April, July, October, and January.

Monthly – If total withholding is $300 to $999 per quarter, the taxes are due the 15th day of the following month.

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.

Semi-Weekly – If total withholding is $5,000 or greater per quarter ($20,000 per year).

Additionally, payers must file reconciliation returns for each quarter and the annual withholding reconciliation statement (REV-1667 R) with the 1099-MISC statements for each payee. Payors will be liable for taxes not withheld in the same manner as employers withholding employee compensation.  

Payees having tax withheld must also file a copy of the 1099-MISC with their Pennsylvania tax return.

Please visit the Our Thoughts On...Energy and Resources blog for more articles, or contact a Schneider Downs tax advisor if you have any questions.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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