Guide Withholding Taxes on Wages

If you're an employer, you need to withhold Massachusetts income tax from your employees' wages. This guide will lead you through your responsibilities as an employer, collecting your employee's tax reporting information, calculating withholding, and filing and paying withholding taxes.

Introduction

Withholding is income tax withheld from wages by employers to pay employees' personal income taxes. As an employer, you must withhold Massachusetts personal income tax from residents' wages for services performed either in or outside Massachusetts and from nonresidents' wages for services performed in Massachusetts.

An employer is any person, corporation or organization someone performs a service as an employee for. An employer may be an:

  • Individual
  • Corporation
  • Partnership
  • Estate
  • Trust
  • Association
  • Joint venture
  • Religious organization
  • Educational organization
  • Charitable organization
  • Social organization
  • Or other unincorporated organization

Employers are responsible for collecting and sending employee withholding to us. Tax-exempt organizations such as religious and government organizations also have to withhold income tax from employees. 

If you're the owner of a business/sole proprietorship, you're generally not considered an employee for withholding purposes even if you have no other employees. Therefore, you wouldn't register for withholding solely to pay your own taxes. However, if you expect to owe more than $400 in Massachusetts income tax on the income you receive from business, you must make individual estimated income tax payments.

An employee is anyone who performs services for another person or organization under that person or organization's direction and control. The employer-employee relationship exists when the person for whom services are performed has the right to control and direct the details and manner in which the job is to be accomplished.

Employer Responsibilities

As an employer, you are responsible for:

  • Registering with DOR to collect withholding taxes.
  • Withholding state income taxes from employees who reside 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 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 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. The telephone number for unemployment insurance information is (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.

Withholding Requirements

As an employer, you must withhold state income taxes from employees who live in or are employed in Massachusetts and send those 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 nonresidents for services performed in Massachusetts. However, if a nonresident 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' home state, you withhold and send to us the full amount determined for Massachusetts. Whether the employee works on the road, at home or in an office you maintain does not affect your withholding obligation.

You don't have to withhold if your only Massachusetts connection is the employment, outside Massachusetts, of a Massachusetts resident. 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 because of the type of income, then you don't have to withhold Massachusetts income tax.

In particular, withholding by household (domestic) employers isn't required. However, domestic employers still need to withhold Social Security tax from household employees. For more information about these requirements, contact the IRS toll-free at (800) 829-1040. Household employers also should contact the Department of Unemployment Assistance at (617) 626-5075 for information on their obligations for state unemployment taxes.

Domestic employers do have the option to withhold federal and state income tax from wages, which can relieve domestic employees from having to pay estimated taxes. The Household Employment Tax Guide provides household 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 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. Generally, lump sum 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 taxation. See Tax Changes Contained in "An Act Enhancing State Revenues" and Related Acts, or Massachusetts Income Tax Withholding on Eligible Rollover Distributions for more information.

To report and pay 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 needs to get its own) and checking the appropriate box.

Payment recipients need to 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. Each payer 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.
  • Pass-through entities may be required to withhold on their members' distributive share. See A Guide for Pass-Through Entities for more information.

Additional Resources

Getting Employee 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 1 job totaling $20 or more in any given month to their employers by the 10th day of the following month. You 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 an Employee's Withholding Allowance Certificate and a Massachusetts Employee's Withholding Exemption Certificate (Forms W-4 and M-4) 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 the allowable Massachusetts withholding exemptions (see Form M-4) are different from U.S. withholding exemptions, employees must complete both Forms M-4 and W-4 for the most accurate withholding.

If an employee has more than 1 job, they may claim exemptions only with their principal employer. Employees who receive income not covered by withholding can ask their employer to withhold extra to pay the tax that will be due on that income.

Additional Resources

Calculating Withholding from Wages

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, semimonthly or monthly basis.

Taxable wages

Taxable wages include all compensation to 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 traveling or other reimbursable expenses, and they return the amount that exceeds the substantiated expenses to the employer, 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:

  Description Calculation
1. Determine employee's wages for the payroll period (weekly, biweekly, etc.). Wages
2. Subtract the amount deducted for Social Security (FICA), Medicare, Massachusetts, U.S. or Railroad Retirement contributions (up to an annual maximum of $2,000). - (Social Security (FICA) + Medicare + etc.)
3. Get subtotal. = Subtotal
4. Subtract the exemption amount (see table below) from the subtotal. If no exemptions claimed, the amount is $0. - (Exemption)
5. Get result/new subtotal. = New subtotal
6. Multiply the result/new subtotal by the current withholding tax rate. × (Withholding tax rate)
7. Get the amount you should withhold. = Withholding amount

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

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:

Payroll period Exemption amount
Daily ($3 × number of exemptions claimed) + $9
Weekly ($19 × number of exemptions claimed) + $66
Biweekly ($38 × number of exemptions claimed) + $131
Semimonthly ($42 × number of exemptions claimed) + $141
Monthly ($83 × number of exemptions claimed) + $284
Annually ($1,000 × number of exemptions claimed) + $3,400

Additional withholding reductions

Payroll period Reduction amount  
  Head of household Blindness exemption *
Daily $0.35 $0.32
Weekly 2.42 2.22
Biweekly 4.85 4.44
Semimonthly 5.25 4.81
Monthly 10.50 9.63

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

Additional Resources

Filing and Paying Withholding

Projected annual withholding tax collected from all employees Return filing requirement Payment due
$100 or less Annually due by January 31 of the following year
MassTaxConnect or Form M-941.
With return
$101 - $1,200 Quarterly due on or before last day of month following close of calendar quarter, i.e., on or before April 30, July 31, October 31 and January 31.
MassTaxConnect or Form M-941.
With return
$1,201 - $25,000 Monthly due on or before 15th day of following month except for the payments for March, June, September, and December - these are due on last day of the following month.
MassTaxConnect or Form M-941.
With return
More than $25,000 Quarterly due on or before last day of month following close of calendar quarter, i.e., on or before April 30, July 31, October 31 and January 31.
MassTaxConnect.

When Massachusetts income tax withheld is $500 or more by the 7th, 15th, 22nd and last day of a month, pay over within 3 business days after that.

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:
    • Annual withholding liabilities
    • Sales/use tax liabilities (including sales tax on meals and telecommunications services), and
    • Room occupancy excise liabilities
    that total $5,000 or more when combined together.

Once your tax liability reaches the electronic filing threshold in 1 year, you must file and pay electronically for all following years, regardless of the amount due, as long as you are obliged to file 1 of the above 3 tax categories (annual withholding, sales/use tax, room occupancy) in Massachusetts. You must file a return for all periods, even when no tax is due - just enter 0 in the appropriate places. All returns with 0 tax due must be filed electronically, regardless of the amount of the business' total tax liability.

Submitting returns and payments

Employers may file returns and make payments electronically, but they must register with us first. 

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. There are penalties for late returns and payments, as well as other penalties.

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 a Dispute" under "I Want To" 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.)

Additional Resources

Reporting and Recording Employee Wage & Withholding

Keeping records

As an employer, you should keep withholding records that include:

  • The name, address, occupation and Social Security number of each employee,
  • The amount and date of all wage payments, the period of services covered by such payments and the amounts of tax withheld,
  • Employees' statements of tips received,
  • Employees' withholding exemption certificates (Forms W-4 and M-4),
  • Employer's copies of employees' Wage and Tax Statements (Form W-2), and
  • Copies of all withholding returns filed with the Department of Revenue.

It's your responsibility to keep all withholding records for at least 3 years after the date the return was filed or the date it was required to be filed, whichever is later. If you failed to file a return or filed a false or fraudulent return, we may request records at any time.

You must also provide each employee with a Form W-2 by January 31. 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.

Reporting information

If you're an employer who has 50 or more employees, you must give us Forms W-2 in a machine-readable form and file them with us by the last day of March for the preceding year. Machine-readable form includes file uploads through MassTaxConnect and electronic data transfer.

Employers with fewer than 50 employees are encouraged to file Forms W-2 in a machine-readable form but must file W-2 information on paper otherwise. Paper Forms W-2 and Reconciliation Form M-3 or Form M-3M must be filed on or before February 28 following the end of the calendar year.

Every employer who has to deduct and withhold taxes on wages must also submit quarterly wage reports. The wage reporting system helps verify eligibility for programs such as Welfare, Medicaid, unemployment compensation and workers' compensation. It's also used to help track down parents who fail to pay the child support they owe. This system's requirements are separate from requirements to submit income tax withholding forms.

You must also report all newly hired employees, employees returning to the payroll and independent contractors within 2 weeks of an employee's first day on the job. Any employer who fails to comply with the wage reporting requirements may be liable for financial penalties.

Additional Resources

Interest and Penalties

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.

Taxpayers 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.

Additional Resources

Image credits:  Open office workers (Shutterstock)

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