S Corps Fake Withholding

[Snaggletooth]

Very Helpful

Flushing out all these concepts on this thread has been extremely helpful to me. I find out my client is missing a withholding requirement for NC, and also Joanmcq gives a solution such that "withholding" is actually that.

Thanks to all...

[Roland Slugg]

This is nothing new. Many states require "withholding" by partnerships and S Corps on the portion of income earned in their state that's taxable to a non-resident partner or shareholder (P/S). The P/S can then elect to be included in a composite return for each state that allows composite returns ... some states don't ... and that will satisfy his filing requirement for each of those states, IF he has no other income reportable to those states.

A P/S does not have to do this. Instead he can file his own return for each non-resident state, and in most cases get some or all of that withholding back. As a practical matter, however, few people would choose to do that, as it would probably cost more in additional tax prep fees than they would save in state taxes. Depends on the size of the numbers. Tax preparers, though, ARE in a position to do this for themselves, if they have access to tax prep software for all required states.

This contributor happens to be an investor in a large REIT-like partnership, and in 2007/2008/2009 filed non-resident returns for about 14 states and recovered roughly two-thirds of the taxes that had been withheld on my behalf by the partnership. All of those refunds would have been forfeited had I elected to be included in composite returns. Yeah, I only made about $20/hour for my time, but it was kinda fun, and I learned a lot of odd-ball things about many states' tax rules and requirements.