Pass-Through Entity Withholding

  1. What is a "pass-through entity"?
  2. Who is required to withhold?
  3. Who is a "nonresident"?
  4. How do I file and pay the withholding?
  5. What exemptions apply?
  6. How does a nonresident file an exemption affidavit?
  7. What is a continuous exemption and how do I apply for one?
  8. If exemptions apply, do I still have to file Form PW-1?
  9. Am I required to make estimated payments?
  10. How do I make payments electronically?
  11. What about composite income tax returns?
  12. Does the nonresident still have to file a Wisconsin return?
  13. Does the 30% long-term capital gain exclusion apply?
  14. Can prior year losses be used to offset the amount subject to withholding?
  15. What happens when a pass-through entity is in a "tiered" structure, where it owns another pass-through entity?
  16. What penalties and interest apply for failure to follow these requirements?

  1. What is a "pass-through entity"?

    A pass-through entity is an organization whose income, loss, deductions and credits flow through and are taxed at the shareholder, partner, or member level. Partnerships, limited partnerships, limited liability partnerships, limited liability companies, tax-option (S) corporations, estates and trusts not taxed at the entity level are all pass-through entities.

  2. Who is required to withhold?

    Any pass-through entity that has Wisconsin income for a taxable year that is allocable to a nonresident partner, member, shareholder, or beneficiary must withhold Wisconsin tax on that income to the extent it is Wisconsin income to the nonresident. The withholding applies regardless of whether the income is actually distributed by the pass-through entity.

    A "pass-through entity" means a partnership, limited liability company, tax-option (S) corporation, estate, or trust that is treated as a pass-through entity for federal income tax purposes.

    The following entities are not required to withhold:

    • An entity that is disregarded for federal income tax purposes.
    • A grantor trust that is not required to file a federal income tax return.
    • A publicly traded partnership as defined under section 7704(b) of the Internal Revenue Code, provided the partnership files a Wisconsin Schedule 3K-1 for each partner.
    • A joint venture that has elected not to be treated as a partnership under section 761 of the Internal Revenue Code.
  3. Who is a "nonresident"?

    A "nonresident" includes:

    • An individual who is not domiciled in Wisconsin.
    • A partnership, limited liability company or corporation whose commercial domicile is outside Wisconsin.
    • An estate or trust that is a nonresident under sec. 71.14(1) to (3m), Wis. Stats.
  4. How do I file and pay the withholding?

    Pass-through entities are required per sec. Tax 1.12(4)(a)13, Wisconsin Administrative Code, to make their payments electronically, as further explained in "Am I required to make estimated payments?" below.

    In addition to the quarterly estimated payments, a pass-through entity is required to file Form PW-1, Wisconsin Nonresident Income or Franchise Tax Withholding on Pass-Through Entity Income, on an annual basis and pay any additional withholding tax due.

    Form PW-1 is due on the unextended due date of the pass-through entity's Wisconsin income or franchise tax return. For tax-option (S) corporations, the filing deadline for the Form PW-1 is the 15th day of the 3rd month following the close of the entity's taxable year. For partnerships, limited liability companies treated as partnerships, trusts, and estates, the filing deadline for the PW-1 is the 15th day of the 4th month following the close of the entity's taxable year. Wisconsin statutes provides for an automatic 7 month extension to file the Form PW-1. If tax is due, interest will be assessed on the tax due during the extension period.

    The Department of Revenue requires that Form PW-1 be filed electronically and the payment be made electronically. Two electronic filing methods are available, including a free program offered by the Department of Revenue. To file your Form PW-1 electronically, go to the department's pass-through entity withholding web page at revenue.wi.gov/eserv/pw/index.html.

    If electronic filing or electronic payment presents an undue hardship, the pass-through entity may request a waiver from the Department to submit a paper return and pay by non-electronic means. Pass-through entities with $25,000 or less of total Wisconsin income passed through to all partners, members, shareholders, or beneficiaries (as computed in Form PW-1, Part 1, Item B) are not required to obtain a waiver. The Electronic Filing or Electronic Payment Waiver Request may be obtained from our website: revenue.wi.gov/forms/misc/eft-102f.pdf.

  5. What exemptions apply?

    Certain types of entities are not required to withhold, as described in "Who is required to withhold?" above. Further, a nonresident is not subject to the withholding if any of the following exemptions apply:

    • The nonresident's share of Wisconsin income from the pass-through entity is less than $1,000.
    • The nonresident files an affidavit with the department using Wisconsin Form PW-2, Wisconsin Nonresident Partner, Member, Shareholder, or Beneficiary Withholding Exemption Affidavit. The pass-through entity must maintain a department-approved copy of the nonresident's Form PW-2 in its records to substantiate the exemption.
    • The nonresident receives a continuous exemption letter from the department. For additional information, see Wisconsin Tax Bulletin #182.
    • The nonresident is exempt from Wisconsin income and franchise taxation. The pass-through entity may rely on a written statement from the member claiming to be exempt from taxation, if the pass-through entity attaches a copy of the statement to its income or franchise tax return for the taxable year. The statement must specify the nonresident's name, address, federal employer identification number, and reason for claiming an exemption.
  6. How does a nonresident file an exemption affidavit?

    To file the affidavit, the nonresident partner, member, shareholder, or beneficiary must use Wisconsin Form PW-2, Wisconsin Nonresident Partner, Member, Shareholder, or Beneficiary Withholding Exemption Affidavit. For each taxable year of the nonresident, a separate Form PW-2 is required for each pass-through entity for which the nonresident wishes to claim the withholding exemption.

    Form PW-2 must be completed and filed with the department on or before the filing deadline to be valid. The filing deadline depends on the type of pass-through entity for which the nonresident is claiming the exemption:

    • For tax-option (S) corporations, the nonresident must file Form PW-2 with the department by the last day of the first month following the close of the S corporation's taxable year. For example, for a shareholder of a calendar year S corporation, Form PW-2 for the 2013 taxable year is due January 31, 2014.
    • For partnerships, LLCs taxed as partnerships, estates, or trusts, the nonresident must file Form PW-2 with the department by the last day of the second month following the close of the entity's taxable year. For example, for a partner of a calendar year partnership, Form PW-2 for the 2013 taxable year is due February 28, 2014.

    The department will then approve Form PW-2 as appropriate and return it to the nonresident within approximately 30 days. To obtain the withholding exemption, the nonresident must present a copy of Part 2 of Form PW-2 to the pass-through entity. The pass-through entity must maintain this copy in its records as documentation for why it did not pay withholding tax on income allocable to that nonresident.

  7. What is a continuous exemption and how do I apply for one?

    Based on a recent review of previously approved Forms PW-2, Wisconsin Nonresident Partner, Member, Share-holder, or Beneficiary Withholding Exemption Affidavit, the department has changed its approval process. On a case-by-case basis, the department will be issuing a "continuous" exemption, which relieves a nonresident of the requirement to file Form PW-2 in future years.

    As a nonresident may not apply for a "continuous" exemption, there is no change in how Form PW-2 is filed. Exemptions will be issued using criteria similar to that used to approve Form PW-2. The exemption will be reviewed annually to ensure the nonresident is paying estimated tax and filing returns as required. Noncompliance by the nonresident will result in revocation of the exemption.

    The department anticipates this process change will benefit both nonresidents and pass-through entities by reducing annual recordkeeping and filing requirements.

  8. If exemptions apply, do I still have to file Form PW-1?

    You do not have to file Form PW-1 for a taxable year if no members of the pass-through entity are required to be reported on Form PW-1. However, if a nonresident claims exemption by filing Form PW-2 affidavit, the pass-through entity is still required to report that nonresident on Form PW-1 and check the box indicating that the nonresident filed the affidavit.

    Additionally, if a nonresident will be filing by being included in a composite Wisconsin income tax return (Form 1CNS or 1CNP), the pass-through entity must still report that nonresident on Form PW-1 and pay the withholding accordingly. (See "What about composite income tax returns?" below for more details).

    A nonresident partner, member, shareholder, or beneficiary is not required to be reported on Form PW-1 if either of the following apply:

    • The nonresident is exempt from Wisconsin income and franchise taxation.
    • The nonresident's share of pass-through income attributable to Wisconsin is less than $1,000.
  9. Am I required to make estimated payments?

    A pass-through entity is required to make quarterly estimated payments of pass-through entity withholding.

    The quarterly payments of withholding tax are due on or before the 15th day of the 3rd, 6th, 9th, and 12th month of the entity's taxable year.

    Pass-through entities are required to make their payments electronically. If electronic payment presents an undue hardship, a pass-through entity may obtain a waiver from the department to pay by other means. If the waiver is granted, taxpayers must use Form PW-ES to make the quarterly estimated withholding tax payments. Do not use Form PW-1 as a substitute for Form PW-ES. In general, the required installment is calculated as follows:

    If the pass-through entity filed a return for the preceding taxable year and that taxable year was not less than 12 months, the required installment is 25 percent of the lesser of the following amounts:

    • Ninety percent of the withholding tax that is due for the taxable year.
    • The withholding tax due for the preceding taxable year.

    If the pass-through entity's preceding taxable year was less than 12 months or if the pass-through entity did not file a return for the preceding taxable year, the required installment is 25 percent of ninety percent of the withholding tax that is due for the taxable year. Section 71.775(4)(h), Wis. Stats., also authorizes the use of an annualization method, if applicable.

  10. How do I make payments electronically?

    Make payments electronically through My Tax Account, the departments online account management system.

    The pass-through entity needs to register for electronic funds transfer if using the ACH Debit payment method when making electronic payments. A pass-through entity using the ACH Debit payment method (authorizing the department's bank to initiate the funds transfer) needs to select the tax type code of 20100, which labels the payment as a Pass-Through Withholding payment.

    A pass-through entity using ACH Credit (authorizing its financial institution to initiate the funds transfer) needs to indicate in the addenda (7) record that the tax type code is 20300 when making an estimated tax payment. When using the ACH Credit payment method, no EFT registration is needed. For further information on making ACH Credit payments, refer to Payment Instructions for Financial Institutions on our website.

  11. What about composite income tax returns?

    If a nonresident will be filing by being included in a composite Wisconsin income tax return (Form 1CNS or 1CNP), the pass-through entity must still report that nonresident on Form PW-1 and pay any additional withholding due as well as filing Form 1CNS or 1CNP.

    The pass-through entity pays the withholding with Form PW-1, as described in "How do I file and pay the withholding?" above, which is due on the unextended due date of the pass-through entity's Wisconsin income or franchise tax return.

    Quarterly estimated payments of pass-through entity withholding may be made using Form PW-ES, as described in "Am I required to make estimated payments?" above.

  12. Does the nonresident still have to file a Wisconsin return?

    Pass-through entity withholding does not relieve nonresidents from their requirement to file a Wisconsin individual income tax return. For nonresidents who elect to be included in a composite Wisconsin income tax return, the pass-through entity must report such nonresidents on both Form PW-1 and the composite income tax return (Form 1CNS or 1CNP).

  13. Does the 30% long-term capital gain exclusion apply?

    The 30% long-term capital gain exclusion (60% for sale of farm assets) provided under Wisconsin law may be used to reduce the amount of pass-through capital gain income allocable to nonresidents who are individuals. This exclusion may also be used to determine if the nonresident has less than $1,000 of income from the pass-through entity.

  14. Can prior year losses be used to offset the amount subject to withholding?

    No. Only the pass-through income and losses of the current year may be used to compute the pass-through income subject to withholding. However the nonresident may elect out of withholding by filing an exemption affidavit (Form PW-2).

  15. What happens when a pass-through entity is in a "tiered" structure, where it owns another pass-through entity?

    If a pass-through entity (called an "upper-tier entity") owns another pass-through entity (called a "lower-tier" entity), the lower-tier entity is required to withhold on the Wisconsin income allocable to the upper-tier entity. The upper-tier entity may then take credit for tax already withheld by the lower-tier entity when it withholds on behalf of its own nonresident members.

    Alternatively, the upper-tier entity may file an exemption affidavit (Form PW-2) to elect out of withholding from the lower-tier entity. In this case, the upper-tier entity would pay the withholding on its total Wisconsin income allocable to its nonresident members even if that income is from the lower-tier entity.

  16. What penalties and interest apply for failure to follow these requirements?

    For a pass-through entity's taxable year that began before January 1, 2007:

    If the pass-through entity did not withhold, it is not liable for interest or penalties if the nonresident partner, member, shareholder, or beneficiary has already filed a Wisconsin income or franchise tax return reporting the income allocable from the pass-through entity. However, if the nonresident does not file a Wisconsin income or franchise tax return reporting the income, the pass-through entity is liable for any tax, interest, and penalties otherwise assessable to the nonresident on the income from the pass-through entity.

    For a pass-through entity's taxable year that began on or after January 1, 2007:

    The pass-through entity may be liable for a penalty if it does not withhold on the Wisconsin income allocable to a nonresident, does not obtain Form PW-2 from the nonresident, and no other exemption applies. The penalty for failure to withhold is 5% of the amount of tax required to be withheld if the failure is for not more than one month, with an additional 5% for each additional month or fraction thereof during which the failure continues, not to exceed 25% of the amount of tax required to be withheld. This penalty may apply even if the nonresident files a Wisconsin income or franchise tax return reporting the income allocable from the pass-through entity.

    For quarterly estimated withholding tax payments for a pass-through entity's taxable years beginning on or after January 1, 2009:

    In the case of any underpayment of quarterly estimated withholding taxes, interest shall be added to the aggregate withholding tax for the taxable year at the rate of 12% per year on the amount of the underpayment for the period of the underpayment. "Period of the underpayment" means the time period beginning with the due date of the installment and ending on either the unextended due date of the return or the date of payment, whichever is earlier. If 90% of the tax due for the taxable year is not paid by the unextended due date of the return, the difference between that amount and the estimated taxes paid, along with any interest due, shall accrue delinquent interest in the same manner as income and franchise taxes.

    However, no interest is required if any of the following conditions apply: (1) the amount of withholding tax due is less than $500; or (2) the amount of withholding tax due is less than $5,000, the pass-through entity had no withholding tax liability for the preceding taxable year, and the preceding taxable year was 12 months.

FOR MORE INFORMATION PLEASE CONTACT:

WISCONSIN DEPARTMENT OF REVENUE
Customer Service Bureau
Mail Stop 5-77
PO Box 8949
Madison, WI 53708-8949
Phone: (608) 266-2776
Fax: (608) 267-1030
Email additional questions to DORSalesandUse@revenue.wi.gov

January 23, 2014