If your small business has employees working in Rhode Island, you'll need to withhold and pay Rhode Island 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 Rhode Island 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. Rhode Island, however, uses the EIN. 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 a Rhode Island withholding tax account with the Rhode Island 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 Combined Online Registration Service. With online registration it can take up to 4 weeks for the DOT to assign your account. To register on paper, use Form BAR, Business Application and Registration. Blanks forms are available from the withholding tax forms section of the DOT website. Submit Form BAR by regular mail. If you register on paper it can take 4-6 weeks for the DOT to assign your account. There is no fee to register your business with the DOT as an employer.
All new employees for your business must complete both a federal Form W-4 and the related Rhode Island Form RI W-4, Employee's Withholding Allowance Certificate. You can download blank Form RI W-4s from 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 Rhode Island, there are five possible payment schedules for withholding taxes: daily, quarter-monthly, monthly, quarterly, and annually. Your payment schedule ultimately will depend on the average amount you hold from employee wages over time. The more you withhold, the more frequently you'll need to make withholding tax payments.
The daily schedule (payment due next banking day) only applies when very large amounts are withheld in a single month. The annual schedule only applies when no tax needs to be withheld for the entire year. Neither of these payment schedules is typical for a small business, and neither are further covered here.
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 three typical payment schedules:
If the payment is due on a Saturday, Sunday, or holiday, the due date is extended to the next business day.
The DOT will send you preprinted coupons—also called withholding returns—to use when making payments. The return you use will depend on your payment schedule. Quarter-monthly payers use Form 941QM, monthly payers use Form 941M, and quarterly payers use Form 941Q. (Daily and annual payers use other returns.) You can download blank returns from the withholding tax forms section of the DOT website. Some businesses are required to pay using electronic funds transfer (EFT). In addition, some businesses elect to pay online through the DOT's Online Services website.
You must file returns for every pay period even if no tax is withheld. For example, a business on a quarter-monthly schedule must file consecutive returns for each quarter-monthly period. If no tax was withheld during a particular quarter-monthly period, a return for such period is still required that includes the reason for no withholding.
For help calculating how much to withhold, as well as other information, check the latest version of the DOT's publication Rhode Island Employer's Income Tax Withholding Tables. You can download a copy from the withholding tax forms section of the DOT website. The publication is updated each year.
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. Use Form RI W-3, Reconciliation of Personal Income Tax Withheld by Employers, available from the withholding tax forms section of the DOT website. (Annual filers—those with no withholding—use a different form with a different due date.) You should attach copies of the federal W-2s sent to all of your employees working in Rhode Island. Larger employers are required to submit W-2s electronically and smaller employers may choose to do so voluntarily. If you submit W-2 information electronically no paper reconciliation form is required. The annual reconciliation form must be filed by mail and 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 basic elements of Rhode Island employee withholding taxes. Rhode Island law states that any officer, agent, servant, or employee of any corporate employer who is responsible for collecting and paying withholding tax fails to collect and pay, he or she may be held personally liable. 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.