Section 71.775(2), Wis. Stats., provides for the withholding tax rates applicable to income distributable to a nonresident partner, member, shareholder, or beneficiary. For an individual, estate, or trust, the applicable withholding tax rate is the highest tax rate for a single individual for the taxable year under s. 71.06, Stats., or 7.75%. For a partnership, limited liability company, or corporation, the applicable withholding tax rate is the highest tax rate for the taxable year under s. 71.27, Stats., or 7.9%.
The 2009 Wisconsin Act 28 changed the highest tax rate applicable to a single individual (and thus to pass-through entities) from 6.75 to 7.75%. Act 28 also made it a requirement for pass-through entities to make estimated quarterly withholding tax payments. Taxpayers need to be aware that a PW-1 and associated quarterly estimated withholding tax payments are required irrespective of whether a 1CNS or 1CNP is filed.
For taxable years beginning prior to January 1, 2005, Form CN-ES, Composite Estimated Tax Voucher, was a convenient vehicle for making estimated tax payments on Wisconsin income allocable to nonresident partners or shareholders. The 2005 Wisconsin Act 25 created sec. 71.775, Wis. Stats., effective for taxable years beginning on or after January 1, 2005. The new section required pass-through entities to pay a withholding tax on income allocable to nonresident partners, members, shareholders, or beneficiaries. Thus, the CN-ES voucher was discontinued (as reported on Wisconsin Tax Bulletin 148, p. 18) and quarterly withholding payments were not required (as reported on Wisconsin Tax Bulletin 150, p. 8). The PW-1, Nonresident Income or Franchise Tax Withholding on Pass-Through Entity Income, replaced the composite return filers' obligation to make quarterly estimated tax payments (as reported on Wisconsin Tax Bulletin 151, p. 4).
Changes made by 2009 Wisconsin Act 28, enacted on June 29, 2009, now require pass-through entities to make quarterly estimated withholding tax payments. The estimated quarterly withholding tax payments for the entire taxable year beginning on or after January 1, 2009, are based on the new 7.75% tax rate. Additional details on this change can be found in Wisconsin Tax Bulletin 162, p. 12. Therefore, the 7.75% rate applies to the entire taxable year period. To address situations where pass-through entities had already made payments based on the old 6.75% rate, sec. 71.775(4)(L), Wis. Stats., provides for transitional "catching up" provisions. The transitional provisions allow pass-through entities to make up for the difference in payment between the old and new rates. Additional details on this transitional provision can be found in Wisconsin Tax Bulletin 162, p. 31-32.
December 10, 2009