When Does a Pennsylvania Pass-Through Entity Have to Pay Individual Income Tax?

SD Medallion Services

By Catherine Martz

Individual Income Tax Withholding for Pass-Through Entities

If you answered “Never,” you get no points awarded this round!  Pennsylvania (and most other states) requires nonresident withholding.  What does this mean?  Pass-through entities, for example Subchapter S Corporations or Partnerships, are entities that are established as a legal being separate from their owners.  As the term suggests, all final income tax reporting of the appropriate ownership share of earnings/losses are “passed through” to the true owners, whether they are individuals, trusts or estates.  The catch is that if the members or partners are nonresidents, Pennsylvania requires the entity to withhold and remit state income tax on the owners’ behalf for any and all PA-source income.

This means that if a partnership has two equal partners, Partner A with in-state residency and Partner B, who lives in another state, the nonresident will have their partnership distribution reduced by the amount the company is required to remit to the state on their behalf.  As an example, partnership AB has taxable income of $80,000 for the year and distributes $10,000 to each partner on a quarterly basis.  Partner A will receive $40,000 for the year, and Partner B will have received $38,772.  Of course, Partner B is able to claim the tax payment of $1,228 when he or she files his/her individual or trust PA income tax return, but shouldn’t be surprised with the lower quarterly distribution payment than that received by his/her equal partner.

Partnerships and S Corporations must use Part A and Part B of PA Form REV-414 to calculate withholding tax.  Pennsylvania requires these entities that anticipate owing less than $500 in annual nonresident tax to remit the entire payment within 30 days after the close of the taxable year.  If annual nonresident withholding is calculated to be $500 or more, payments must be made either in full with the first quarter or on a quarterly basis via PA-40ES.

This tax treatment has been in place relative to Partnerships and S Corporations and became effective for trusts and estates for tax years beginning after December 31, 2013.   Trusts or estates are now required to withhold Pennsylvania taxes on PA-source income that is distributed or distributable to nonresident beneficiaries.  The withheld tax is paid with the filing of the Form PA-41 or paid with the filing of a trust extension.

The next time you find yourself in a game of PA tax trivia, you’ll know the correct answer to the question posed in the title to this piece!

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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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