Provision contained in new state budget
The Governor signed the budget Monday that was approved by the state legislature which includes a provision that will impact Pennsylvania companies that hire out of state contractors. The non-resident withholding provision will require PA companies to withhold income tax when paying a contractor from another state.
The PA business will have to withhold 3.07% in state income tax when paying an out-of-state contractor if that contractor is paid at least $5,000 in a year. Companies located near the state borders could be especially impacted. It also creates a tricky situation if the PA business doesn’t think it will exceed the $5,000 threshold and doesn’t withhold tax, only to go over that limit later and be forced to return to a contractor who’s already been paid for the tax money.
NFIB fought non-resident withholding saying it would be costly and a paperwork nightmare for Pennsylvania businesses. We argued that it turns small-business owners into uncompensated state tax collectors and hurts their relationships with outside contractors. NFIB said filing the current 1099 form is entirely different than making a PA business responsible for tracking, collecting and submitting another company’s tax liability.
Despite a hard NFIB fight, the non-resident withholding provision did pass. The legislature found itself under pressure to fill a 2.2 billion-dollar deficit. There were also lengthy delays in finding budget funding solutions acceptable to both the House and Senate. In turn, NFIB was successful in stopping a series of tax increases on small businesses from being included in the budget, such as increases in natural gas, electricity and phone service.
The new non-resident withholding requirement will be put into effect within 60 days. If you contract with an out-of-state business, consult your accountant for more detail on how to comply.