Pass-Through Entity Quarterly Estimated Withholding Tax Payments
September 15, 2009, marked the first time many calendar year pass-through entities were required to make quarterly estimated withholding tax payments. This article provides guidance regarding this new requirement for pass-through entities. Further details on the changes to pass-through entity withholding enacted by 2009 Act 28 can be found in Wisconsin Tax Bulletin 162 (page 30).
Date Dates of Installments
Except as provided during the transition period, a pass-through entity shall make quarterly payments of withholding tax on or before the 15th day of the 3rd, 6th, 9th, and 12th month of the taxable year.
Section 71.775(4)(L), Wis. Stats., provides a transition or grace period for making estimated payments of withholding tax that become due less than 45 days after July 1, 2009. The due date of these payments is extended to the next subsequent installment due date. For example,
- A pass-through entity on a calendar year basis would have made its first payment subject to these new provisions on September 15, 2009. This payment would have accounted for the 1st, 2nd, and 3rd installment payments.
- A pass-through entity on a fiscal year beginning on February 1, 2009, will make its first payment subject to these new provisions on October 15, 2009. This payment must account for the 1st, 2nd, and 3rd installment payments.
- A pass-through entity on a fiscal year beginning on March 1, 2009, would have made its first payment subject to these new provisions on August 15, 2009. This payment would have accounted for the 1st and 2nd installment payments.
- A pass-through entity on a fiscal year beginning on June 1, 2009, would have made its first payment subject to these new provisions on August 15, 2009. This payment would have only accounted for the 1st installment payment.
The required amount of each installment (except if computing annualized income under sec. 71.775(4)(h)), Wis. Stats., is 25% of the lesser of the following amounts: (1) 90% of the withholding tax that is due for the taxable year; or (2) the withholding tax due for the preceding taxable year. The second option does not apply if the preceding taxable year was less than 12 months or if the pass-through entity did not file a return for the preceding taxable year.
In case of any underpayment of quarterly estimated withholding tax, a pass-through entity shall add interest 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 Form PW-1, 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.
In computing the required installments, a pass-through entity should consider applicable exemptions, if any. A nonresident member's share of income from the pass-through entity shall not be subject to withholding if any of the following apply:
- The member is exempt from Wisconsin income 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.
- The member's share of income from the pass-through entity is less than $1,000.
- The member files an affidavit with the department, in the form and manner prescribed by the department, whereby the nonresident member agrees to file a Wisconsin income or franchise tax return and be subject to the personal jurisdiction of the department, the Tax Appeals Commission, and the courts of Wisconsin for the purpose of determining and collecting Wisconsin income and franchise taxes, including estimated tax payments, together with any related interest and penalties. Form PW-2, Wisconsin Nonresident Partner, Member, Shareholder, or Beneficiary Withholding Exemption Affidavit, is the required affidavit form. See the paragraphs below for instructions for claiming this exemption.
Claiming the Form PW-2 affidavit exemption
Nonresident members claiming an exemption must not file a Form PW-2 for each estimated payment. Form PW-2 must be filed after the end of the pass-through entity's taxable year. For tax-option (S) corporations, the filing deadline is the last day of the first month following the close of the tax-option (S) corporation's taxable year. For partnerships, LLCs taxed as partnerships, estates, or trusts, the filing deadline is the last day of the second month following the close of the entity's taxable year.
Filing Form PW-2 in this fashion would create timing delays since the pass-through entity may potentially not know which affidavits would get approved before the pass-through entity's deadline for filing its respective return. Securing assurances from the nonresident members that they will timely file their respective PW-2s would be point of consideration for the pass-through entity. Note that sec. 71.775(4)(bn), Wis. Stats., makes the pass-through entity ultimately liable for any unpaid tax, interest, and penalty otherwise assessable to a nonresident partner, member, shareholder, or beneficiary. A pass-through entity may also be liable for the negligence penalty under s. 71.83 (1), Wis. Stats.
How to Make Electronic Payments
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.
How to Report Estimated Payments
The Wisconsin Administrative Code requires the filing of Form PW-1 and the payment of pass-through entity withholding tax by electronic means. If a pass-through entity was granted a waiver for the filing of its 2008 Form PW-1, then the pass-through entity has an automatic waiver only from the requirement to electronically pay the 2009 taxable year quarterly estimated withholding tax payments. The pass-through entity must file its Form PW-1 and report the estimated payments on Form PW-1 along with any balance due or refund owing. Unless an extension is in effect, Form PW-1 is due on the unextended due date of the pass-through entity's income or franchise tax return. For tax-option (S) corporations, the filing deadline 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 is the 15th day of the 4th month following the close of the entity's taxable year.
Last updated September 17, 2009