News Briefings - State Taxes
The following article was taken from the 3/15/2010 issue of State & Local Taxes Weekly.
3/16/10 -- New Mexico enacts withholding tax requirements for pass-through entities
by Harry Markowitz, Esq. (RIA)
New Mexico has enacted legislation that requires pass-through entities (PTE's) to make quarterly withholding tax payments on net income distributed to their non-resident owners. The new law also requires that certain employers will have to file quarterly withholding information returns. The provisions of the legislation go into effect on January 1, 2011. (L. 2010, H120 (c. 53), effective 01/01/2011)
Withholding for pass-through entities. The new legislation provides that PTE's must make quarterly withholding tax payments on net income distributed to their non-resident owners. Although owners can agree to make the quarterly payments on their own behalf, the new legislation provides that the PTE remains liable for the tax if the owner does not pay it. PTE net income is defined as the income reported to an owner by the PTE for federal income tax purposes. The obligation to deduct and withhold from payments or net income does not apply to payments that are made to: (1) a corporation whose principle place of business is in New Mexico or an individual who is a resident of New Mexico; (2) the United States, New Mexico or any agency, instrumentality or political subdivision of either; (3) any federally recognized Indian nation, tribe or pueblo or any agency, instrumentality or political subdivision of either; or (4) a federally tax-exempt organization.
A "pass-through entity" means any business association other than: (1) a sole proprietorship; (2) an estate or trust that does not distribute income to beneficiaries; (3) a corporation, limited liability company (LLC), partnership or other entity not a sole proprietorship taxed as a corporation for federal income tax purposes for the taxable year; (4) a partnership that is organized as an investment partnership in which the partners' income is derived solely from interest, dividends and sales of securities; (5) a single member limited liability company (LLC) that is treated as a disregarded entity for federal income tax purposes; or (6) a publicly traded partnership.
Every withholder will be liable for amounts required to be deducted and withheld by the Withholding Tax Act regardless of whether the amounts were in fact deducted and withheld, except that: (1) if the withholder fails to deduct and withhold the required amounts and if the tax against which the required amounts would have been credited is paid, the withholder will not be liable for those amounts not deducted and withheld; or (2) if the withholder's failure to deduct and withhold the required amounts was due to reasonable cause, the withholder will not be liable for amounts not deducted and withheld. The making of a timely election for federal income tax purposes that changes the net income of a pass- through entity in a prior quarter is a reasonable cause for failure to withhold and deduct the required amounts on the change in net income due to the election. In addition, a new minimum threshold for withholding requirements is established of $30 per quarter, corresponding to nearly $2,500 of annual income and equivalent to $10 of withholding per month. The requirement for PTE's to withhold on net income of nonprofits or federal, state, local or tribal governments is removed.
The rate of withholding will be set by a Taxation and Revenue Department directive. The rate, however, cannot exceed the higher of the maximum corporate or personal income tax rate for the tax year. PTE's can base withholding on the prior year's net income if that year was a full year.
Employer withholding information returns. The new legislation provides that an employer that has more than 50 employees and is not required to file an unemployment insurance tax form with the New Mexico Workforce Solutions Department or a payor must file quarterly a withholding information return with the Department on or before the last day of the month following the close of the calendar quarter. The quarterly withholding information return must contain all information required by the Taxation and Revenue Department, including: (1) each employee's or payee's Social Security number; (2) each employee's or payee's name; (3) each employee's or payee's gross wages, pensions or annuity payments; (4) each employee's or payee's state income tax withheld; and (5) the workers' compensation fees due on behalf of each employee or payee. Each quarterly withholding information return must be filed with the Department using a Department-approved electronic medium. Failure to file the quarterly information return can result in a $50 fine.
