If your small business has employees working in Ohio, you'll need to withhold and pay Ohio 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 Ohio state income tax withholding for employees.
Note: Apart from state taxes, Ohio also has withholding tax requirements for school districts. This article does not separately cover Ohio school district income tax withholding.
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 Ohio) 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. Generally, if you apply online, you will receive your EIN immediately.
Apart from your EIN, you also need to establish an Ohio withholding tax account with the Ohio Department of Taxation (DOT). You set up your account by registering your business with the DOT online or on paper. To register online, use the DOT's Ohio Business Gateway (OBG) website. If you register online you should receive your Ohio tax ID number immediately. To register on paper, use Form IT 1, Application for Registration as an Ohio Withholding Agent. You can download blank forms from the withholding tax forms section of the DOT website. You can submit Form IT 1 by regular mail or by fax (the mailing address and fax number are shown on the form). If you register on paper you should receive your Ohio tax ID number in 4-6 weeks. There is no fee to register your business with the DOT.
All new employees for your business must complete both a federal Form W-4 and the related Ohio Form IT 4,Employee's Withholding Exemption Certificate. You can download blank Form IT 4s from the the withholding tax forms section of the DOT website. You should keep the completed forms on file at your business and update them as necessary.
In Ohio, there are three primary payment schedules for withholding taxes: partial weekly (known in other states as semi-weekly), monthly, or quarterly. In exceptional cases, where the tax due during a payment period is very high, there is also a next banking day payment requirement, not covered here. The more you withhold, the more frequently you'll need to make withholding tax payments.
Newly registered employers generally are placed on a quarterly payment schedule. An existing employer's filing and payment frequency for state income tax withholding is determined each calendar year by the combined amount of state and school district taxes that were withheld, or required to be withheld, during the 12-month period ending June 30 of the preceding calendar year (known as the "look-back" period).
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.
Here are the due dates for the various payment schedules:
If a payment is due on a Saturday, Sunday, or holiday, the due date is moved forward to the next business day.
Effective January 1, 2015, monthly and quarterly payments generally must be made online via the Ohio Business Gateway (OBG) using Form IT 501, Employer's Payment of Ohio Tax Withheld. Some employers may apply for and receive approval from the DOT to file and pay on paper using the same Form IT 501. Partial weekly payments must be made via electronic funds transfer (EFT) and do not use Form IT 501. You can download blank forms from the withholding tax forms section of the DOT website.
The DOT provides several different methods for calculating how much tax to withhold. For more information, check the most current version of the tax withholding tables on the DOT website. These tables generally are updated each year.
Apart from making scheduled tax payments, businesses making payments on a partial weekly schedule also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. If you need to file this return, use Form IT 942, Ohio Employer's Quarterly Reconciliation of Income Tax Withheld. This return must be filed online via OBG. Because it must be filed online, Form IT 942 is not available on the DOT 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 holiday, the due date is moved forward to the next business day.
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 summarizing the employee's withholding for the year. Ohio requires two different filings in this regard, and each has a different due date.
First, if you are on a monthly or quarterly payment schedule, submit Form IT-941, Ohio Employer's Annual Reconciliation of Income Tax Withheld. Or, if you are on a partial weekly payment schedule, use Form 942, Ohio Employer's EFT 4th Quarter/Annual Reconciliation of Income Tax Withheld. Form 942 must be filed online through OBG. Regardless of which form you use, the due date is the last day of the month following the end of the calendar year (i.e., January 31).
Second, submit Form IT 3, Transmittal of Wage and Tax Statements. Unlike in the past, small employers are not required to include paper copies of their Ohio employees' federal W-2s with Form IT 3. Employers with many employees must submit W-2s electronically using a DOT-approved format. Form IT 3 must be filed by mail and is due on or before the last day of February.
As with tax payments, if a return due date falls on a Saturday, Sunday, or holiday, the due date is moved forward 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 the basic elements of Ohio employee withholding taxes. Ohio law states that you can be held personally liable if you control or are responsible for withholding tax reports and payments and fail to properly file or pay. 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.