If your small business has employees working in South Carolina, you'll need to withhold and pay South Carolina 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 South Carolina 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 South Carolina) 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 a South Carolina withholding tax account with the South Carolina Department of Revenue (DOR). You set up your account and obtain a state withholding tax ID number by registering your business with the DOR. You can register online or on paper. To register online, go to the South Carolina Department of Revenue MyDORWAY website. To register on paper, use the SCDOR-111 form, Business Tax Registration. You can download the form from the Business Forms section of the DOR website. If you register by mail, you should receive your number within approximately 3 weeks. There is no fee to register your business with DOR.
All new employees for your business must complete both a federal Form W-4. Unlike many other states, Nebraska does not have a separate state equivalent to Form W-4, but instead relies on the federal form. You can download blank Forms W-4 from irs.gov. Clearly label W-4s used for state tax withholding as your state withholding form. You should keep the completed forms on file at your business and update them as necessary.
South Carolina distinguishes between resident and nonresident employers for purposes of withholding taxes. Resident employers follow the federal (IRS) rules for scheduling tax payments; they make their South Carolina withholding tax payments when they make their federal withholding tax payments. Nonresident employers must pay either quarterly or monthly depending on how much is being withheld. This article only covers resident employers.
Under the federal tax withholding rules, there are two primary payment schedules for withholding taxes: monthly or semiweekly. In rare cases, there is also a next-day payment requirement, which is not covered here. Your payment schedule will depend on the average amount you withhold from employee wages. The more you withhold, the more frequently you'll need to make withholding tax payments. New employers start on a monthly payment schedule. After you have been an employer for enough time, your schedule will be based on the amount withheld during a so-called lookback period.
The exact threshold dollar amounts for the different payment schedules, as well as other rules, can change over time, so you should check with the DOR and IRS at least once a year for the latest information.
Here are the federal due dates for the two main payment schedules:
If payment is due on a Saturday, Sunday, or holiday, the due date is the next business day.
Employers with withholding above a certain threshold during a quarter, or who make 24 or more payments in a year, must pay electronically. Other employers may pay electronically or on paper. Electronic payments are made using either MyDORWAY or electronic funds transfer (EFT). If you pay on paper, use Form WH-1601, Withholding Tax Payment Coupon when mailing in your check. You can download blank coupons from the Business Forms section of the DOR website.
For information on how much tax to withhold, as well as other important matters, check current versions of DOR Form 103, Withholding Tax Tables (updated each year), DOR Form WH-1603F, Formula for Computing South Carolina Withholding Tax, and DOR Form 105, South Carolina Withholding Tax Information Guide. These publications are available from the Withholding section of the DOR website.
Apart from making scheduled tax payments, businesses also must file quarterly withholding tax returns. The returns reconcile the tax paid for the quarter with the tax withheld for the quarter. Returns can be filed online or on paper. To file online, use the DOR's MyDORWAY system. To file on paper, use Form WH-1605, SC Withholding Quarterly Tax Return for the first three quarters, and Form WH-1606, SC Withholding Fourth Quarter and Annual Reconciliation Return for the fourth quarter.
The first three quarterly returns each year are due on or before the last day of the month following the close of the quarter. The final return (for the quarter that ends the year) is due by the last day of the following February. In other words:
As with tax payments, any return due date that falls on a Saturday, Sunday, or holiday, the due date is extended to the next business day.
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. South Carolina uses the quarterly withholding return for the final quarter of the year, Form WH-1606, SC Withholding Fourth Quarter and Annual Reconciliation Return, as its annual reconciliation. You should attach copies of the federal W-2s sent to all of your employees working in South Carolina. Large employers are required to submit W-2s electronically and smaller employers may elect to do so. As mentioned above, the annual reconciliation 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 the basic elements of South Carolina employee withholding taxes. Under South Carolina law, people associated with a business that fails to collect and pay withholding tax may be held personally liable as a "responsible party." 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.