If your small business has employees working in Vermont, you'll need to withhold and pay Vermont 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 Vermont 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 Vermont) 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 Vermont withholding tax account with the Vermont Department of Taxes (DOT). You set up your account by registering your business with the DOT either online or on paper. To register online, you'll need to have an online account set up for your business through the Secretary of State website. You can login to that account and then choose the option for Business Tax Registration. If you register online, the DOT will process your application and send you further information within 3-5 business days. To register on paper, use Form BR-400, Application for Business Tax Account. You can submit Form BR-400 by regular mail or by fax. If you register on paper, the DOT will process your application and send you further information within 7-10 business days. There is no fee to register your business with the DOT.
All new employees for your business must complete a federal Form W-4 and also should be encouraged to complete the related Vermont Form W-4VT, Employee's Withholding Allowance Certificate. If an employee does not submit a Form W-4VT, you may use the information from the Form W-4. You can download blank Forms W-4VT from the Business Forms section of the DOT website. You should keep the completed forms on file at your business and update them as necessary.
In Vermont, there are three main payment schedules for withholding taxes: semiweekly, monthly, or quarterly. 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.
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 the payment is due on a weekend or holiday, the due date is extended to the next business day.
The DOT will send you withholding returns to use when making payments. If you are on a semiweekly payment schedule you must pay using electronic funds transfer (EFT). You must file form EFT-1 to register with the DOT to pay by EFT. If you are on a monthly or quarterly schedule, you can file on paper using Form WH-431, Return of Income Tax Withheld. Monthly and quarterly payers can also be paid electronically using the VTBizFile website.
For help calculating how much tax to withhold, check the current version of the DOT publication Income Tax Withholding Instructions, Tables, and Charts. The publication, which is updated each year, can be downloaded from the DOT website.
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. To file the annual reconciliation, use Form WH-434, Reconciliation of Withholding Tax Account. You should attach copies of the federal W-2s sent to all of your employees working in Vermont. Large employers must file W-2s electronically. Electronic filers should use the DOT's VTW2eFile online filing service. The annual reconciliation is due on or before the last day of February. As with withholding tax payments, if the last day of February falls on a weekend or holiday, the due date is extended 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 Vermont employee withholding taxes. 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.