If your small business has employees working in Hawaii, you’ll need to withhold and pay Hawaii 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 Hawaii 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 Hawaii) 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 Hawaii withholding tax account with the Hawaii Department of Taxation (DOT). You set up your account by registering your business with the DOT either on paper or online. Once you’ve registered you’ll be issued a Hawaii Tax ID Number. To register on paper, use Form BB-1, State of Hawaii Basic Business Application. You can download a blank application form from the Tax Forms section of the DOT website. Submit paper applications by regular mail. To register online, submit Form BB-1 through the Hawaii Business Express (HBE) website. There is no fee to register your business with the DOT for withholding tax purposes (other tax registrations can incur a fee).
All new employees for your business must complete a federal Form W-4 and also the related Hawaii Form HW-4,Employee's Withholding Allowance and Status Certificate. If an employee does not provide a completed Form HW-4, you must withhold tax from the employee’s wages as if the employee were single and claimed no withholding allowances. You can download blank Form HW-4s from the Tax Forms section of the DOT website. You should keep the completed forms on file at your business and update them as necessary.
In Hawaii, there are three possible payment schedules for withholding taxes: semiweekly, monthly, or quarterly. 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 DOT 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 regular work day.
Employers on a semiweekly payment schedule generally are required to make payment using electronic funds transfer (EFT). Similarly, any taxpayer with annual withholding above a high threshold also must pay electronically. To file electronically, use the DOT’s E-File website. In the unusual case that you file semiweekly but are not required to file electronically, send payments with Form VP-1, Tax Payment Voucher. In addition, all semiweekly payers also must submit quarterly returns. Use Form HW-14, Withholding Tax Return, and attach federal Schedule B (Form 941) (using Hawaii dates and amounts). The Form HW-14 with attached federal schedule is due by the 15th day of the month following the close of the quarter. Quarterly returns must be filed even if no tax is due.
Other employers have the option to file electronically or on paper. To file electronically, use the DOT’s E-File website. To file on paper, use Form HW-14, Withholding Tax Return. A version of Form HW-14 is used for both monthly and quarterly filers. You can contact the DOT and request a tax return booklet containing a set of preprinted Form HW-14 monthly or quarterly withholding tax returns. (The DOT no longer automatically mails booklets to taxpayers.) You can also download blank forms from the Tax Forms section of the DOT website. Returns must be filed for each month or quarter even if no tax is due.
The DOT provides several different methods for calculating how much tax to withhold. For more information, check the current version of the DOT’s Booklet A, Employer’s Tax Guide. The booklet is updated every few years. You can download a copy from the general forms page on the DOT website.
After the end of the year, you must file an annual reconciliation with the DOT 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 and Hawaii Form HW-2 summarizing the employee’s withholding for the year. To file the annual reconciliation, use Form HW-3, Employer’s Annual Return and Reconciliation of Hawaii Income Tax Withheld from Wages. You can download blank forms from the Tax Forms section of the DOT website. You must include copies of Hawaii Form HW-2 or federal Form W-2 sent to all of your employees working in Hawaii with your HW-3. The annual reconciliation must be filed by mail and is due on or before the last day of February. As with tax payments and returns, if the due date falls on Saturday, Sunday, or legal holiday, substitute the next regular work day as the due date.
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 Hawaii employee withholding taxes. Under Hawaii law, if any employer fails, neglects, or refuses to deduct and withhold or pay the amount of tax required, a person who is under a duty to withhold or pay the tax required (with limited exceptions), and who willfully fails to perform such duty, will be liable to the state for the amount of tax. Avoid possible penalties for making mistakes by checking both the IRS and DOT websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.