Pass-Through Entity Withholding
- Who is required to withhold?
- Who is a "nonresident"?
- How do I file and pay the withholding?
- What exemptions apply?
- How does a nonresident file an exemption affidavit?
- If exemptions apply, do I still have to file Form PW-1?
- What about estimated payments?
- What about composite income tax returns?
- Does the nonresident still have to file a Wisconsin return?
- What about the 60% long-term capital gain exclusion?
- Can prior year losses be used to offset the amount subject to withholding?
- What happens when a pass-through entity is in a "tiered" structure, where it owns another pass-through entity?
- What penalties and interest apply for failure to follow these requirements?
- 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 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.
- 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.
- How do I file and pay the withholding?
Use Wisconsin Form PW-1, Wisconsin Nonresident Income or Franchise Tax Withholding on Pass-Through Entity income. Form PW-1 should be filed once per year and is due on the unextended due date of the pass-through entity's Wisconsin income or franchise tax return.
The Department of Revenue requires that Form PW-1 must be filed electronically and the payment must be made electronically. Three electronic filing methods are available, including two free programs 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 http://www.revenue.wi.gov/eserv/pw/index.html.
For pass-through entities that have not registered with the Department of Revenue for electronic funds transfer (EFT), all three programs accept payments by direct debit, which does not require pre-registration. For more information on registering for EFT, visit the Department's web site at http://www.revenue.wi.gov/eserv/eft3.html.
If electronic filing or electronic payment presents an undue hardship, a pass-through entity may obtain a waiver from the Department to file and pay by other means. The Instructions for Form PW-1 provide details.
- 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 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.
- The nonresident's share of Wisconsin income from the pass-through entity is less than $1,000.
- 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 2007 taxable year is due January 31, 2008.
- 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 2007 taxable year is due February 29, 2008.
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.
- 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 2007 taxable year is due January 31, 2008.
- 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 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.
- What about estimated payments?
A pass-through entity is not required to make quarterly estimated payments of pass-through entity withholding. Form PW-1 should be filed once per year by the unextended due date of the pass-through entity's Wisconsin income or franchise tax return.
By law, this single, annual payment is deemed to be made in equal quarterly installments, so that the withholding does not inadvertently cause a nonresident to be subject to underpayment interest. However, if a nonresident files a Form PW-2 affidavit electing not to be subject to withholding, that taxpayer should have made sufficient Wisconsin estimated payments to cover his, her, or its Wisconsin income tax liability in order to avoid underpayment interest.
- What about composite income tax returns?
If a nonresident will be filing 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, in addition to filing the Form 1CNS or 1CNP. The pass-through entity pays the withholding with one Form PW-1, due on the unextended due date of the pass-through entity's Wisconsin income or franchise tax return, instead of with quarterly composite estimated payments.
- 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).
- What about the 60% long-term capital gain exclusion?
The 60% long-term capital gain exclusion provided under Wisconsin law (sec. 71.05(6)(b)9., Stats.) 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.
- 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).
- 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.
- 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 MORE INFORMATION PLEASE CONTACT:
WISCONSIN DEPARTMENT OF REVENUE
Customer Service Bureau
Mail Stop 5-77
P.O. Box 8949
Madison, WI 53708-8949
Phone: (608) 261-6261
Fax: (608) 267-1030
E-Mail Additional Questions
Last updated January 15, 2008