Withholding Taxes on Wages

Prior to the enactment in 2017 of the federal Tax Cuts and Jobs Act (TCJA), most withholding allowances were based on personal exemptions, including those for the employee, spouse and any dependents. The TCJA made significant changes to tax rates, deductions, tax credits and withholding calculations, and changed the value of personal exemptions to zero. 

As of January 1, 2020, IRS Form W-4 has been revised to reflect changes resulting from the TCJA where the withholding calculation is no longer tied to the number of personal exemptions claimed.

The TCJA did not impact Massachusetts laws regarding exemptions. To accurately determine the correct amount of Massachusetts withholding, employers will rely on Massachusetts Form M-4.

New employees are expected to complete both Form W-4 and Form M-4 for employers. It is not necessary for current employees to resubmit the federal Form W-4 unless they choose to adjust their withholding amounts. Employees who choose to make adjustments will submit both Form W-4 and Form M-4 to the employer.

As an employer, you are responsible for:

• Registering with DOR to collect withholding taxes.
• Withholding state income taxes from your employees who reside in or are employed in Massachusetts and sending in those taxes, along with the appropriate form or electronic return, on time.
• Getting each employee's completed federal Employee's Withholding Allowance Certificate (Form W-4) and Massachusetts Employee's Withholding Exemption Certificate (Form M-4).
• Reporting all newly-hired employees, employees returning to work after 30 days or more off the payroll, and independent contractors who will be earning $600 or more.
• Filing quarterly reports of wages paid to each employee who resides in or is employed in Massachusetts.
• Providing each employee with a Wage and Tax Statement (Form W-2) by January 31, or within 30 days, if employment terminates before the end of the calendar year, showing:
  • The total amount of wages paid;
  • The total Social Security and Medicare taxes withheld; and
  • The amount of federal and Massachusetts income tax withheld for the prior year.
• Contacting the Department of Unemployment Assistance to fulfill obligations for state employment security taxes. For unemployment insurance information call (617) 626-5075.
• Contacting the Internal Revenue Service (IRS) to fulfill obligations for withholding federal income taxes as well as Social Security and Medicare taxes. For more information, call the IRS toll-free at (800) 829-1040.
• Paid Family and Medical Leave
  • As of October 1, 2019, Massachusetts employers are required to remit Paid Family and Medical Leave (“PFML”) contributions on behalf of employees to the Department of Revenue. This Guide does not address employer responsibilities related to PFML. For more information about this program and employer responsibilities, please visit the Department of Family and Medical Leave’s website.

As an employer, you must withhold state income taxes from salaries or payments made to employees who live in or are employed in Massachusetts and you must send them in, along with the appropriate form or electronic return, on time.

If you're a Massachusetts employer with a nonresident employee, you still need to withhold wages paid to the nonresident for services performed in Massachusetts. However, if a nonresident employee doesn't work in Massachusetts, even if they're paid from a Massachusetts office, you don't have to withhold.

Non-Massachusetts employers

If you're a non-Massachusetts employer who conducts business or maintains an office in Massachusetts, you must withhold the amount determined for Massachusetts income tax purposes, minus any amount deducted and withheld for your own state. If there's no state withholding in your business's home state, you must withhold and send to us the full amount determined for Massachusetts purposes. Whether the employee works on the road, at home or in an office maintained by you, does not affect your withholding obligation as the employer.

You don't have to withhold if your only connection to Massachusetts is the employment of a Massachusetts resident outside of Massachusetts. However, you may withhold for the employee's convenience if both you and the employee agree. The employee will owe Massachusetts income tax if you don't withhold state income taxes.

Federal withholding not required

If there is no requirement to withhold federal income tax, then you don't have to withhold Massachusetts income tax.

Generally, withholding is not required by household/domestic employers. However, such employers still need to withhold Social Security tax from their employees. For more information about these requirements, contact the IRS at (800) 829-1040. Household/domestic employers also should contact the Department of Unemployment Assistance at (617) 626-5075 for information regarding their obligations for state unemployment taxes.

Household/domestic employers have the option to withhold federal and state income taxes from wages, which can relieve employees of the responsibility to pay estimated taxes. The Household Employment Tax Guide provides household/domestic employers with the information they need to fully understand their obligations when hiring household help.

Pension, annuity and other similar payments

Payments of pension, annuity and/or other similar payments made to Massachusetts residents who haven't elected to be exempt from U.S. income tax withholding are subject to Massachusetts income tax withholding requirements. Generally, lump sum payments and eligible rollovers from qualified pension and annuity plans are also subject to Massachusetts withholding, unless they're of a type that would never be subject to Massachusetts personal income tax. See Tax Changes Contained in "An Act Enhancing State Revenues" and Related Acts, or Massachusetts Income Tax Withholding on Eligible Rollover Distributions.

To report and remit pension and annuity withholdings, the pension or annuity plan's trustee or administrator must register with us, using the plan's federal tax identification number (generally required) and checking the appropriate box.

Payment recipients must file a Massachusetts Withholding Exemption Certificate for Pension, Annuity and Other Periodic Payments and Nonperiodic Payments (Form M-4P) with the plan's trustee or administrator. Returns are due annually, and payments follow the same schedule as wage withholding. Anyone who is registered to withhold must file an annual report, whether they withheld Massachusetts taxes during the calendar year or not.

Returns and payments must be made electronically. See Filing and Paying Withholding for payment requirements.

Interstate motor and rail carrier employers

Interstate rail and motor carrier employers are required to withhold Massachusetts income tax from their workers who are Massachusetts residents, and from their workers who are not Massachusetts residents but who still perform all their regularly assigned duties in Massachusetts. See Employees of Interstate Motor and Rail Carriers for more information.

Other types of required withholding

• Venues, promoters, or others who compensate performers or performing entities need to withhold on payments for athletes and entertainers who perform in Massachusetts.
• Lottery winnings of $600 or more are also subject to withholding even if it's not required under IRS guidelines.
• Casino and sports wagering winnings are subject to withholding if it is required under IRS guidelines.
• Pass-through entities may be required to withhold on their members' distributive share. See Tax Guide for Pass-Through Entities for more information.

For withholding purposes, you need to get the employee's:

• Full name
• Home address
• Social Security Number
• Total number of exemptions, and
• Any additional withholding amounts the employee requests to have withheld.

You should also withhold income from tips. Tips are considered part of an employee's pay and must be taken into account when determining withholding. Employees must report tips from any one job totaling $20 or more in any given month to their employers by the 10th day of the following month. You should use this reported amount to calculate withholding by adding the reported tips to the employee's pay.

Employees must report the above-listed information on a Form M-4 - Employee's Withholding Exemption Certificate and claim the proper number of exemptions. Employees can change the number of their exemptions on Form M-4 by filing a new certificate at any time if the number of exemptions increases. If the number of exemptions decreases, they need to file a new certificate within 10 days.

If an employee has more than one job, they may claim exemptions only with their principal employer. Employees who receive other income that is not withheld from can ask their principal employer to withhold extra taxes to cover the additional tax that will be due on that income.

Withholding is calculated based on:

• The employee's taxable wages;
• The number of exemptions claimed; and
• Any additional withholding amounts requested on the Massachusetts Employee's Withholding Exemption Certificate (Form M-4).

Calculate withholding either by using the withholding tax tables or by using the percentage method. These methods, which are explained in Income Tax Withholding Tables (Circular M), may be applied on a daily, weekly, biweekly, semi-monthly or monthly basis.

Taxable wages

Taxable wages include all compensation received by an employee for services they performed, including:

• Wages
• Salaries
• Tips
• Commissions
• Bonuses
• Fees
• Any other item of value paid to an individual for services performed as an employee.

Travel and other reimbursable business expenses

If the employee can substantiate their travel or other reimbursable expenses, and they return to the employer any amount that exceeds the substantiated expenses, then these payments aren't subject to withholding. Such payments must be identified either by making a separate payment or by indicating the separate amounts if both wages and expense allowances are combined in a single payment. If the employee doesn't have to substantiate expenses or return excess payments, the payments must be included in the employee's wages and are subject to withholding.

Withholding tax tables

You can use the withholding tables provided in Circular M to calculate how much you should withhold for an employee. Refer to the appropriate table in Circular M, and find where wages earned in their payroll period (left side of the table) and the number of exemptions they claimed on their M-4 (on the top of the table) line up together.

If the taxpayer is filing as head of household and/or either the taxpayer or their spouse is blind, reduce the withholding amount according to the 'Additional withholding reductions' table below.

Percentage method

The percentage method is a formula for calculating withholding, calculated as follows:

The exemption amount is based on the number of withholding exemptions the employee claimed on their Employee's Withholding Exemption Certificate (Form M-4) and the applicable payroll periods. The following table calculates the exemption amount:

Additional withholding reductions

* These amounts should be doubled if both the taxpayer is blind and the taxpayer's spouse is blind and not otherwise subject to withholding.

Requirements

You must file returns and pay withholding taxes electronically if:

• You're a new business or existing business applying for an additional registration (regardless of the amount of annual tax liability)
• You're a payroll service provider (third-party bulk filer)
• You're making performer withholding returns and payments (venue, promoter or someone who compensates performers or performing entities)
• You're an employer/business with an annual combined tax liability of $5,000 or more tallied from among all of the following types of taxes:
  • Withholding
  • Sales/use tax (including sales tax on meals and telecommunications services)
  • Room occupancy excise
  • Alcoholic beverages excise
  • Cigarette & tobacco
  • Gasoline & fuel
  • Ferry embarkation
  • Satellite service, and 
  • Convention Center finance surcharges.

Further information about electronic filing and payment requirements Is available on the Department’s website.

Submitting returns and payments

Employers must register with us before filing returns and make payments electronically. 

An electronically filed return or report is considered timely filed if it's electronically submitted (with all accurate required information) on or before the due date, before 12 a.m. EST. After submitting it, you'll receive a confirmation number and time-and-date stamp, which proves time and filing date.

For a paper return to be considered timely filed, we must receive it on or before the due date, or if delivered after the due date, it must be postmarked by the U.S. Postal Service or date-stamped by a private delivery service at least 2 days before the due date.

Correcting withholding payment errors

MassTaxConnect users can use the “Amend” feature to change previously filed withholding, sales and use tax (including sales tax on meals) and room occupancy tax returns. Business taxpayers can also use MassTaxConnect to dispute an audit finding or a penalty by choosing "File an Appeal" under "Other Actions" in their account for each tax type.

Some taxpayers have to file amended returns and applications for abatement electronically. See if electronic filing and payment requirements apply to you.

If you don't have to file electronically, you can check the amended return box on your paper return and file it the way you usually do to amend a previously filed return, or file an Application for Abatement  (Form ABT) to:

• Dispute an audit finding
• Dispute a penalty, or
• Dispute a responsible person determination (Form ABT must be used to dispute a responsible person determination.)

If you either fail to provide an employee with a Form W-2 or issue a false Form W-2, you may be fined up to $1,000 and/or imprisoned for up to 1 year.

There are interest and penalty charges for not filing withholding tax returns on or before the due date:

• The penalty for late payment is 1% of the unpaid tax shown on the return per month (or fraction thereof), up to a maximum of 25%.
• The penalty for failing to file a return by the due date is 1% of the balance due per month (or fraction thereof), up to a maximum of 25%.

If you fail to pay the tax when due, you'll also be charged interest at the federal short-term rate (which can change quarterly) plus 4%, compounded daily. Call our Customer Service Bureau at (617) 887-6367 or toll-free in Massachusetts at (800) 392-6089 for more information on these rates.

Businesses with more than $25,000 in annual withholding liabilities who fail to make timely deposits of withholding tax are liable for a 5% penalty on the amount of any part of a tax payment or weekly deposit they didn't pay on time.

Willful tax evasion is a felony punishable by a fine of up to $100,000 for individuals or $500,000 for corporations and/or imprisonment of up to 5 years.

Willful failure to collect and pay over taxes is also a felony and is punishable by a fine of up to $10,000 and/or imprisonment of up to 5 years.

Employers who do not comply with the requirements to file returns, make payments or electronically submit data to us will be penalized up to $100 for each return, payment or data transfer they submitted incorrectly.