If your small business has employees working in Massachusetts, you'll need to withhold and pay Massachusetts 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 Massachusetts 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. Many states issue separate tax ID numbers for withholding tax purposes. Massachusetts, however, uses the EIN. You can apply for an EIN at the IRS website. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish a Massachusetts withholding tax account with the Massachusetts Department of Revenue (DOR). Massachusetts asks all businesses to register online using the state's WebFile for Business system. However, if you don't have access to a computer, the state allows you to register by phone using its Business Telefile system. There is no fee to register your business with the DOR.
All new employees for your business must complete a federal Form W-4 and should also complete the related Massachusetts Form M-4, Massachusetts Employee's Withholding Exemption Certificate. You can download blank Forms M-4 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.
Massachusetts also requires you to report all newly hired or reinstated employees to the DOR within 14 days of hire or reinstatement. This is related to collection of child support payments. See the DOR website for more details.
In Massachusetts, there generally are four possible payment schedules for withholding taxes: weekly, monthly, quarterly, or annually. Your payment schedule ultimately will depend on the average amount you withhold from employee wages in a year. 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 DOR at least once a year for the latest information.
Due dates for payments are:
If the payment is due on a Saturday, Sunday, or holiday, the due date is extended to the next business day.
All new businesses are required to make payments and file returns online regardless of their annual tax liability. Use the state's WebFile for Business site to make payments. Older businesses may still have the option to file on paper. There are different payment forms for different payment schedules: weekly uses Form M-941W, monthly uses Form M-942, quarterly uses Form M-941, and annually uses Form M-941A. In addition, weekly payers must file a quarterly return, Form M- 941D, that reconciles their payments for their quarter.
For help calculating how much tax to withhold, check the latest version of DOR Circular M, Income Tax Withholding Tables, available from the withholding tax forms section of the DOR website. The circular is updated each year.
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. Depending on your withholding tax payment schedule, you'll need to use either Form M-3, Reconciliation of Massachusetts Income Taxes Withheld for Employers Filing Quarterly, or Form M-3M, Reconciliation of Massachusetts Income Taxes Withheld for Employers Filing Monthly. You should attach copies of the federal W-2s sent to all of your employees working in Massachusetts. Smaller employers may file by mail. Larger employers (50 or more W-2s) must file information in machine-readable form. For filings by mail the due date is 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 Massachusetts employee withholding taxes. 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.