If your small business has employees working in Indiana, you’ll need to withhold and pay Indiana 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 Indiana 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 Indiana) 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 Indiana withholding tax account with the Indiana Department of Revenue (DOR). You set up your account by completing Form BT-1, Business Tax Application, to register your business with the DOR. You can submit Form BT-1 online through the Business Tax Application section of the DOR website.
All new employees for your business must complete a federal Form W-4 and also should complete the related Indiana Form WH-4, Employee’s Withholding Exemption and County Status Certificate. You can download blank Form WH-4s from the withholding tax forms section of the DOR website. You should keep the completed forms on file at your business and update them as necessary.
In Indiana, there are four possible payment schedules for withholding taxes: early filer, 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. New employers will be assigned a schedule based on anticipated monthly wages.
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 DOR at least once a year for the latest information.
Here are the due dates for the various payment schedules:
Formerly, many Indiana withholding tax payers could pay on paper by sending in Form WH-1, Indiana Employer’s Withholding Tax Return, with a check. However, as of 2013, all Indiana withholding tax payments and WH-1s must be filed electronically. You have two options for electronic payments: the DOR’s INtax system or electronic funds transfer (EFT). You must file a WH-1 for every payment period even if no tax was withheld.
For help calculating how much tax to withhold, check the DOR’s Departmental Notice #1 (How to Compute Withholding for State and County Income Tax). You can download a copy of the notice from the withholding tax forms section of the DOR website.
After the end of the year, you must file an annual reconciliation with the DOR 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. Formerly, many businesses could submit the reconciliation on paper using Form WH-3, Annual Withholding Tax Form, and including copies of the W-2s sent to all employees working in Indiana. Now, however, businesses must file the annual reconciliation and employee W-2s online through the DOR’s INtax system. The annual reconciliation is due on or before the last day of February.
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 Indiana employee withholding taxes. Under Indiana law, officers, members, or employees of a business who have a duty to deduct and pay withholding taxes are personally liable for those taxes as well as penalties and interest. Avoid possible penalties for making mistakes by checking both the IRS and DOR websites for the latest information. You also can get more information about small business tax issues in other articles here on Nolo.com.