New – Illinois Nonresident Withholding Requirements

–>  Effective for tax years ending on or after 12/31/08, partnerships, S-Corporations and trusts, are required to make “pass through entity payments of Illinois taxes on behalf of nonresident partners, shareholders, and beneficiaries.

–> Under the new law, a pass-through entity must remit tax withholding to the Illinois Department of Revenue on behalf of nonresident shareholders, partners or beneficiaries for each taxable year.  The withholding is reported to nonresident owners on the respective Schedule K-1-Ps or K-1-Ts.

–>  The tax payments required are computed on Form IL-1000 and the rate will vary depending upon the type of entity for which the payment is required (i.e. if the nonresident is an individual it is 3%, if the nonresident is a partnership it is 1.5% etc.). Pass-through entity withholding payments are due with Form IL-1000 by the original due date of the entity’s income tax return, without regard to any extension.

–>  For these purposes, an Illinois resident is defined as:

a. An individual who is domiciled in the state;

b. The estate of a decedent who was domiciled in Illinois at the time of death;

c. A trust created under the will of a decedent domiciled in Illinois at the time of death; and

d. An irrevocable trust created by a grantor that was domiciled in Illinois when the trust became irrevocable.

–>  All other taxpayers are considered nonresidents.

–>  Withholding payments are not required on behalf of “non-individual” partners, shareholders or beneficiaries if they have completed and given to the partnership a Form IL-1000-E (Certificate of Exemption for Pass-through Entity Payments) electing to pay the required tax on its annual income and replacement tax return.

–>  Withholding is required on any nonresident individual unless they have elected to be included in a composite return filed by the entity. Kindly note that Form IL-1000-E is not available for use by individuals.

–>  Corrected on 01/23/09, The substraction allowed on line 26 of the IL-1065 for personal service income distributable to a partner or resonable compensation for services performed by a partner for the partnership should be included in the business income fo the partnership that is subject to pass through entity withholding. The instruction to line 1 of the IL-1000 for partnership should read:

“Add line 26 and 27, and substract line 21. Multiply the result by line 43, then add lines 44 and 46″

Manen Kothari