State issues new rules for 1099 tax withholding requirements

New state tax withholding requirements have created two new obligations for individuals and businesses that pay certain out-of-state individuals. The new rules will require withholding the amount of Pennsylvania Personal Income Tax (currently 3.07 percent) and remitting them to the state through the Department of Revenue.

“When we initially learned of these changes, PAR began some investigating. It’s clear that the new rules were passed quickly and were not targeted at the real estate industry, but they will, in fact, affect a small number of brokers and Realtors®,” said Hank Lerner, PAR director of law and policy.

The first change is that anyone who pays non-employee compensation to individuals (and certain types of entities) on a 1099 basis (a “payor”) will now be required to withhold Personal Income Tax from those payments IF the contractor is a non-resident AND earns more than $5,000 in a calendar year from that payor.

“For example, if an agent works for a Pennsylvania real estate company, but lives in New Jersey, the company must withhold the personal income tax from the agent’s commissions and submit to the state department of revenue if the agent earns more than $5,000 during the year,” Lerner said. “But no withholding is required for other agents at that brokerage who are Pennsylvania residents.”

Another scenario would involve working with an out-of-state service provider. “If a Pennsylvania agent uses an individual home stager based in New York, the agent would be responsible for withholding if the total amount paid goes over $5,000 a year. But no withholding is necessary if the provider is a corporate entity, or if the annual compensation is under $5,000.”

The other change addresses property leased for business purposes from an out-of-state individual, estate or trust that would ordinarily be subject to the personal income tax. For those transactions, the tenant will be required to withhold personal income tax from lease payments and remit those amounts to the state.

“PAR anticipates a small number of tenants will be impacted by this change,” Lerner said. “Most importantly, the commercial test is based on the use of the property by the tenant/lessee, not whether the owner/lessor is leasing for business income. This means that tenants under residential real estate leases wouldn’t be subject to withholding because the tenant is not using the property for commercial purposes.”

It is unclear at this time, exactly how these rules would affect property management companies. PAR has requested additional information from the Department of Revenue and is working with other stakeholders to secure clearer guidance on this issue.

Several new guidance documents and forms have been created by the Department of Revenue over these past few months, and the advice to consumers and accountants has been evolving during that time.

We encourage you to contact your own local accountant as soon as possible to determine if you may have situations covered by these new rules, and if so, how best to comply with them.