If your small business has employees working in Arkansas, you'll need to withhold and pay Arkansas income tax on their salaries. This is in addition to having to withhold federal income tax for those same employees. Here are the basic rules on Arkansas state income tax withholding for employees.
Note: There are special rules for Texarkana employers that are not covered here.
With rare exceptions, if your small business has employees working in the United States, you'll need a federal employer identification number (EIN). You should obtain your EIN as soon as possible and, in any case, before hiring your first employee. EINs are issued by the IRS and you'll need one first and foremost for federal taxes. In addition, some states use the federal EIN for state withholding tax purposes. Other states (like Arkansas) issue separate state tax ID numbers. You'll need an EIN to register with the state (see below). You can apply for an EIN at IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish an Arkansas withholding tax account with the Arkansas Department of Finance and Administation (DFA). You set up your account by registering your business with the DFA either online or on paper. To register online, use the Arkansas Taxpayer Access Point (ATAP). If you register online you should receive your account number immediately. To register on paper, use Form AR-1R, Combined Business Tax Registration Form. Blank forms are available from the DFR website. If you register on paper, you should receive your withholding tax number within five days. There is no fee to register your business for withholding tax purposes with the DFR (some other registrations do incur a fee).
All new employees for your business must complete a federal Form W-4. New employees also should complete one of two related Arkansas forms: Form AR4EC, Employee's Withholding Exemption Certificate, or Form AR4ECSP,Employee's Special Withholding Exemption Certificate. You can download blank forms from the withholding tax forms section of the DFA website. You should keep the completed forms on file at your business and update them as necessary.
You must report any newly-hired employee to Arkansas's new hire registry. You can do this online at the Department of Workforce Services.
In Arkansas, there are two possible payment schedules (filing statuses) for withholding taxes: monthly or annually. The annual schedule is only for employers with very low amounts of withholding; therefore, annual filers are not common. Your payment schedule will depend on the average amount you withhhold from employee wages over time. Newly-registered employers are assigned a monthly schedule.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, may change over time so you should check with the DFA at least once a year for the latest information.
Due dates for payments are:
If the payment is due on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
The DFR urges all employers to file their payments and vouchers online. You can do this through the ATAP website. You must include payment vouchers with your withholding tax payments. Current versions of the payment vouchers, Form AR941M, Monthly Wage Withholding Report (for monthly filers), and Form AR941A, Employer's Annual Withholding Report (for annual filers), are not available for download from the DFA website. The DFA should automatically send you preprinted payment vouchers. You must file a voucher for every payment period even if no taxes are withheld.
Employers with higher average monthly withholding are required to pay by electronic funds transfer (EFT). These employers can pay using the ATAP website or various forms of automated clearing house (ACH) transactions.
The DFR provides several different methods for calculating how much tax to withhold. For more information, check the DFR publication Withholding Tax Tables and Instructions for Employers. You can download a copy from the withholding tax forms section of the DFA website. The publication is updated each year.
After the end of the year, you must file an annual reconciliation with the DFA that summarizes the employee taxes you've withheld during the year. The annual reconciliation is in addition to providing each of your employees with a federal Form W-2 summarizing the employee's withholding for the year. The DFA encourages employers to file the annual reconciliation online through the ATAP website. Use Form AR-3MAR, Employer's Annual Reconciliation Of Income Tax Withheld. As with payment vouchers, the DFA should send you the necessary annual reconciliation forms. You should include Form ARW3, Transmittal of Tax and Wage Statements, and attach the state copies of the W-2s sent to all of your employees working in Arkansas. Larger employers are required to file W-2s electronically. The annual reconciliation is due on or before the last day of February. As with tax payments, if this date falls on a Saturday, Sunday, or holiday, the due date is extended to the next business day
This article is only concerned with employees, not independent contractors. In general, different tax rules apply to independent contractors.
You may decide that it's easiest to hand over responsibility for payroll, including withholding taxes, to an outside payroll service. If so, keep in mind that your business, or even you personally, may still be held directly responsible for mistakes made by an outside payroll company.
This article touches on only the most basic elements of Arkansas employee withholding taxes. Under Arkansas law, every employer can be held personally and individually liable for amounts required to be deducted and withheld. Avoid possible penalties for making mistakes by checking both the IRS and DFA websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.