States Seek Freedom from Paper by Requiring EFT for Income Tax Withholding

In a quest for efficiency, reduced cost and independence from paper, each year more states are following the Internal Revenue Service’s lead and requiring employers to remit all income tax withholding payments electronically.

Electronic funds transfer of income tax withholding is mutually beneficial for state revenue departments and employers because it eliminates postage and paper costs and avoids the chance for lost mail and penalties for late returns.

Employers have been required to remit federal income tax withholding using electronic funds transfer (EFT) via the Electronic Federal Tax Payment System since Jan. 1, 2011, when the IRS dropped the federal EFT threshold to zero from $200,000, and each year more states institute similar requirements. 

Some states are beginning to follow the federal government’s lead. For example, Ohio released June 20  Proposed Rule 5703-7-19, which would require all employers to remit income tax withholding and file returns electronically. The rule would take effect Jan. 1, 2015, after a comment period that ends July 1, 2014. Ohio’s current EFT threshold is $84,000 in payments during a 12-month look-back period.

Other states with an across-the-board electronic filing requirement include Connecticut, Delaware, Hawaii, Indiana, Kansas, Oregon and Virginia. Connecticut is the most recent state to require EFT for all withholding payments: effective Jan. 1, 2014, the state requires employers to remit all withheld funds electronically. The previous threshold was $2,000 per year. Although these states require EFT for all payments, they often allow employers to file for exemptions if the EFT requirement presents a burden on the employer.

A long with the movement toward electronic-only payment requirements, states are also reducing withholding amount thresholds that trigger EFT. Effective July 1, 2014, Nebraska is to reduce its threshold to $8,000 in payments a year from $9,000, and is to reduce it by $1,000 each July until 2017, when the threshold reaches $5,000 a year.

Several states reduced thresholds effective Jan. 1, 2014: Maine reduced its threshold to $12,000 in a look-back period from $14,000, West Virginia reduced its threshold to $25,000 in payments a year from $50,000, and Pennsylvania reduced it to $1,000 a payment from $10,000 a payment. West Virginia is to further reduce its threshold to $10,000 a year, effective Jan. 1, 2015.

When states makes the decision to require EFT for all payments or reduce EFT thresholds, they also often end the mailing of deposit coupons for employers, even if nonelectronic deposit options are available. Employers that wish to remit payments on paper often will need to seek such deposit coupons out, and they are often available on a state revenue department’s website.

For more information on state requirements for electronic funds transfer, see Payroll Administration Guide’s “Electronic Funds Transfer and Online Reporting Requirements” chart.

By Allison M. Gatrone