If your small business has employees working in the District of Columbia, you’ll need to withhold and pay District of Columbia 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 District of Columbia 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 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 a District of Columbia withholding tax account with the Office of Tax and Revenue (OTR). You set up your account by filing Form FR-500, Combined Registration Application for Business DC Taxes/Fees/Assessments, with the OTR. You can register either online or on paper. To register online, go to the OTR’s Electronic Taxpayer Service Center (eTSC). If you register online you should receive your account number within one business day. To register on paper, download Form FR-500 from the eTSC. If you register on paper you should receive your account number within 2-3 business days. There is no fee to register your business with the OTR.
All new employees for your business must complete a federal Form W-4. They also should complete the related District of Columbia Form D-4, DC Withholding Allowance Certificate. If an employee does not provide a Form D-4, the employer is required to withhold DC income tax as if the employee had not claimed any withholding allowances. You can download blank Form D-4s from the Withholding Tax Forms and Publications section of the OTR website. You should keep the completed forms on file at your business and update them as necessary.
In the District of Columbia, there are three possible payment schedules for withholding taxes: monthly, quarterly, or annually. Your payment schedule ultimately will depend on the average amount you withhhold from employee wages over time. The more you withhold, the more frequently you’ll need to make withholding tax payments. Employers must pay on a monthly payment schedule unless otherwise instructed by the OTR.
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 OTR 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.
You can make payments on paper (by check) or online. If you pay by check, submit your payment with the proper withholding return:
The OTR will mail you a booklet with the proper forms unless you file online. To file and pay online, use the OTR’s eTSC website. With eTSC you can pay using electronic funds transfer (EFT), credit/debit cards, or ECheck. You must file a return for every reporting period even if no tax was withheld.
The OTR provides several different methods for calculating how much tax to withhold. For more information, check OTR Form FR-230, Income Tax Withholding Instructions and Tables. The publication is updated every year. You can download a copy from the Withholding Tax Forms and Publications section of the OTR website.
After the end of the year, employers who pay on a monthly or quarterly schedule (which is most employers) must file an annual reconciliation with the OTR. The annual reconciliation summarizes the employee taxes you’ve withheld during the year. Filing of 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. Use Form FR-900B, Employer/Payor Withholding Tax Annual Reconciliation and Report. You must include copies of the W-2s sent to all of your employees working in the District of Columbia with the reconciliation. Larger employers must file electronically. Smaller employers may file electronically or by regular mail. The OTR follows the Social Security Administration’s specifications for electronic filing of W-2s, which may be found through the Social Security Administration . The annual reconciliation and copies of W-2 are due on or before January 31st. As with tax payments and returns, if that date falls on a Saturday, Sunday, or legal 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 District of Columbia employee withholding taxes. Under District of Columbia law, corporate officers may be held personally liable for the payment of taxes owed to DC. Avoid possible penalties for making mistakes by checking both the IRS and OTR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.