Federal Tax Code Overhaul Means New State Compliance Rules

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By Jamie Rathjen

The changes for state income tax withholding in 2018 largely depend on how the tax code overhaul affects state withholding methods.

North Dakota, Oregon, and Vermont delayed the release of the 2018 withholding tables so adjustments based on the 2018 Internal Revenue Service withholding tables could be made to ensure compliance. Colorado, which was not planning to release new tables until the end of 2018, said it may have to update its tables. Missouri updated its formula for 2018, but said it would release new withholding guidelines in early February.

New York is considering a payroll tax on employers to work with or replace its withholding system, the state Department of Taxation and Finance said in a Jan. 17 report to Gov. Andrew Cuomo (D). Several options were presented by the department, including a payroll tax calculated according to the withholding system, or the replacement of the state income tax with the payroll tax. The tax could also be a flat rate based on the income tax rates or a surcharge on supplemental wages, which then would no longer be subject to state income tax, the department said.

Oregon passed legislation (H.B. 2017) in July to establish a statewide payroll tax to fund transportation projects. Under the measure, employers are to withhold 0.1 percent of employees’ wages, and the tax is to be separate from the existing withholding system. The tax is to apply to Oregon residents, regardless of where they work, and nonresidents who work in Oregon. The tax is to have its own quarterly return and annual reconciliation, a spokesman for the state revenue department told Bloomberg Tax Dec. 1.

Jurisdictions that released updated 2018 withholding tables are California, the District of Columbia, Idaho, Illinois, Kentucky, Maine, Minnesota, Mississippi, Missouri, New Mexico, New York, Rhode Island, and South Carolina.

Some states changed the thresholds for electronic filing of Forms W-2. Illinois and Maryland removed their thresholds, requiring all employers to file 2018 forms electronically. Illinois’s previous threshold was 250 W-2s and Maryland’s was 25. Wisconsin reduced its threshold to 10 from 50.

North Carolina requires its Form NC-3, Annual Reconciliation Return, to be filed electronically, but annually grants a waiver for businesses unable to meet the requirement. The latest such waiver covers Forms NC-3 and associated federal Forms W-2 and 1099 due on or before Jan. 31, 2018.

Iowa was to require all employers to file Forms W-2 and 1099 electronically with the state beginning with forms filed in 2018. However, the requirement was postponed to take effect Jan. 1, 2019. Iowa’s requirement that employers with 50 Forms W-2 file electronically is still in effect.

The gradual migration to the federal W-2 filing deadline of Jan. 31 of deadlines for filing state copies of Forms W-2 and other annual reconciliations continued in 2017. Arizona, Arkansas, Illinois, Kansas, and Montana changed deadlines to Jan. 31. The remaining states using a different deadline, Feb. 28, are Hawaii, Maine, Michigan, New Jersey, Oklahoma, and West Virginia. Missouri moved the deadline for electronic filers to Jan. 31, but retained the Feb. 28 date for paper filers. Thirty-two states, the District of Columbia, and Puerto Rico now use a Jan. 31 deadline.

One state made a change to its withholding filing frequencies. Effective Jan. 1, 2018, Hawaii requires employers who previously filed monthly returns to file quarterly.

Massachusetts does not use all of the federal exclusion amounts for transportation fringe benefits, but has its own amounts updated each year. For 2018, Massachusetts’s amounts are $260 a month for parking and $135 a month for transit passes.

The 2018 federal transportation benefit exclusion amounts are to be $260 a month for parking and $260 a month for transit passes.

To contact the reporter on this story: Jamie Rathjen in Washington at jrathjen@bloombergtax.com. To contact the editor on this story: Michael Baer at mbaer@bloombergtax.com.

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

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