If your small business has employees working in Connecticut, you’ll need to withhold and pay Connecticut 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 Connecticut state income tax withholding for employees.
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 Connecticut) 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 the IRS website, IRS.gov. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Connecticut withholding tax account with the Connecticut Department of Revenue Services (DRS). You set up your account by registering your business with the DRS either online or on paper. Once registered, you’ll be issued a Connecticut Tax Registration Number. To register online, use the Taxpayer Service Center on the DRS website. To register on paper, use Form REG-1, Business Taxes Registration Application. Blank forms are available for download from the Registration/Application Forms section of the DRS website. There is no fee to register your business with the DRS for withholding tax purposes (other types of tax registration can incur a fee).
All new employees for your business must complete both a federal Form W-4 and the related Connecticut Form CT-W4, Employee's Withholding Certificate. You can download blank Form CT-W4s from the withholding tax forms section of the DRS website. You should keep the completed forms on file at your business and update them as necessary.
In Connecticut, there are three primary payment schedules (remitter classifications) for withholding taxes: weekly, monthly, or quarterly. In exceptional cases, some employers may request and receive an annual payment schedule (not covered here). There are also special rules for seasonal employers, household employers, and agricultural employers (not covered here). Most new employers will be classified as quarterly remitters. Your payment schedule ultimately will depend on the average amount you withhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments.
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 DRS at least once a year for the latest information.
The due dates for the various payment schedules are as follows:
If the payment is due on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.
You must remit withholding tax payments electronically. Do not file on paper unless you have been granted a waiver from DRS. You can make payments either online using the Taxpayer Service Center (TSC) or by phone using the Business Telefile System.
The DRS provides several different methods for calculating how much tax to withhold. For more information, check the current version of DRS Circular CT, Connecticut Employer’s Tax Guide. The guide is updated every year. You can download a copy from the withholding tax forms section of the DRS website.
Apart from making scheduled tax payments, businesses also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. You must file a quarterly return even if you are on an annual payment schedule for federal taxes and even if no tax is due for the quarter.
Quarterly returns must be filed electronically. File returns through the TSC. Do not file on paper unless you have been granted a waiver by DRS. Blank copies of the quarterly return, Form CT-941, Connecticut Quarterly Reconciliation of Withholding, are available from the withholding tax forms section of the DRS website.
Quarterly returns are due on or before the last day of the month following the close of the quarter:
As with tax payments, any return due date that falls on a Saturday, Sunday, or legal holiday is extended to the next business day. Employers who make timely withholding payments and owe no additional withholding for the quarter have ten days after the normal due date to file the quarterly return.
After the end of the year, you must file an annual reconciliation with the DRS 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. You must file the annual reconciliation electronically (unless DRS has granted you a waiver). (As recently as 2014, DRS temporarily suspended the electronic filing requirement for annual reconciliations and W-2s for small employers; if you are a small employer, and want to file on paper, you should check with DRS.) Use Form CT-W3, Connecticut Annual Reconciliation of Withholding, and submit through the TSC. You must include copies of the W-2s sent to all of your employees working in Connecticut. You can key in or upload W-2 information through the TSC. Form CT-W3 and the related W-2 information are due on or before the last day of March. As with tax payments and quarterly returns, if the due date falls on a Saturday, Sunday, or legal holiday, it 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 Connecticut employee withholding taxes. Avoid possible penalties for making mistakes by checking both the IRS and DRS websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.