Nonresident Withholding

What is nonresident withholding?

Nonresident withholding is state tax a pass-through entity must withhold and remit on income allocated to owners who do not live in that state. The state collects up front rather than trusting a nonresident to file. If your firm has partners or shareholders outside its home state, withholding is often mandatory unless an exemption applies. Missing it creates entity-level liability, not just an owner problem.

When withholding is required and when it is not

Rules vary by state and usually hinge on the amount of income allocated to the nonresident. Many states waive withholding if the owner signs an agreement to file personally, or if the entity includes them on a composite return. Some exempt corporate partners or amounts below a small threshold. Each state has its own form and its own deadline. The firm, not the owner, is on the hook for getting it right.

How it shows up on the K-1

Amounts withheld are reported to the owner, who claims them as credits against their state liability. If withholding exceeds actual tax, the owner files to get a refund. Coordination matters: an owner who is already paying estimates in that state may end up substantially overpaid for the year. Tell owners about withholding before year end so they can adjust their own estimated payments rather than financing the state interest-free.