But My Employees Pay State Tax!
As employers, some states require you to withhold state taxes from employee’s paychecks. However, you also need to file Department of Labor (DOL) labor reports showing quarterly wages and pay a tax percentage based on those wages. The amounts you pay go toward each state’s unemployment insurance program into a pool connected to your state employer identification number.
The amounts owed decrease each quarter based on total wages less excess wages for each quarter—with quarter four being the lowest percentage amount you’ll have to pay annually.
This may sound confusing, but fear not! Below we’ll break down everything you need to do, step-by-step to make the process easier.
Apply for a State ID
If you don’t already have a state ID, you’ll need to apply for one. Visit the US Department of Labor’s website office search page (link in reference section) and enter your zip code; the site will direct you to your closest labor office—see screenshot to right, click to enlarge.
Most state offices have downloadable forms to apply for an employer ID number which is NOT your Federal Employer Identification Number (FEIN) from the Internal Revenue Service; however, you will need your FEIN when applying for a state ID number.
Download, print and fill out the form and mail, email or fax it based on instructions (some states allow you to apply online) and you’ll receive a number via email or snail mail. If you’re a new business owner, this is one of the must-have license numbers you must apply for: As soon as your obtain your FEIN, if you will hire even one employee, apply for the number as soon as possible.
Once the application process is completed, you will receive a wage reporting booklet that includes pre-filled forms showing the name of your business, address, FEIN and state employer ID number. If you don’t receive your booklet by the end of the first quarter you need to begin reporting wages, again, most state DOL offices allow you to download a blank form.
Percentage Calculations by State
Each state has different percentage calculations employers must utilize in order to determine the amount due each quarter. Along with percentages, each state also has what are called excess wages. In New Mexico for example, any wages in excess of $21,900 for year 2011 are exempt from tax and these excess wages change annually.
The percentage amount is based on how many unemployment claims are connected to your state DOL employer number. If you’re a new business, often the DOL will issue you a standard percentage until you have some business history behind you.
For one company I own, which was opened in 1998, the percentage I must use is 2.7% and is based off unemployment claims submitted throughout the years of operation.
When you receive confirmation an employer ID number has been assigned, you will also receive the percentage you must use. The percentage will also be included in the quarterly wage reporting booklet you receive.
Completing the Form
For your convenience you can download an example DOL labor report form (link in reference section). The form is for the State of New Mexico; however, most states’ forms are very similar.
As you’ll see once you’ve retrieved the form, it is a blank form. Let’s walk through each step of completing the form and filing requirements.
Filing Requirements – Employers must file quarterly reports for quarters one through four (January to March, April to June, July to September, and October to December). Most states give due dates for reports as follows:
- Quarter One – Due by April 30th
- Quarter Two – Due by July 31st
- Quarter Three – Due by October 31st
- Quarter Four – Due by January 31st of the following year.
As you can see, the New Mexico wage report is blank so you will need to insert the company’s name, address, state DOL number, tax percentage rate, quarter for which you are reporting wages, due date, and your FEIN. Some states, such as New Mexico also require that you include a field office number, which you can obtain from your local DOL, and your sales tax number. In New Mexico, the sales tax number is required as state withholding tax withheld from employee’s paychecks is filed along with sales tax reporting forms either monthly or quarterly.
Other states require state taxes withheld from employees filed via other directives; or some states don’t require state tax be withheld from employee’s paychecks. Check with your local taxation and revenue department and DOL office to help you determine how to file and pay state taxes withheld from employee’s paychecks.
Gather Wage Information
Next, you’ll need to determine the gross wages paid to each employee during the deemed quarter. If you have payroll software, some of these programs have the capability of printing your state report so you don’t have to manually determine amounts.
Gross wages amounts for each employee along with full names and social security numbers must be listed on the report—or if you have a printed report from your software, you can simply attach it to the report and write “see attached wage report.”
Once you have a list of all gross wages, total them up. If any employee has been paid over the excess wage amount, you do not have to pay tax on those wages. Let’s look at an example:
- 122-22-2222 – John Smith – Gross Wages $15,000 – Excess Wages - $0 – Taxable Wages - $15,000
- 123-23-3333 – Mary Smith – Gross Wages $22,000 – Excess Wages - $100 ($22,000-$21,900 for New Mexico) – Taxable Wages - $21,900.
- 122-22-2222 – John Smith – Gross Wages $5,000 – Excess Wages $0 (has not reached $21,900) – Taxable Wages - $5,000.
- 123-23-3333 – Mary Smith – Gross Wages $15,000 – Excess Wages $15,000 (Mary Smith has already reached the total excess wages for the year of $21,900) so Taxable Wages are zero.
For each quarterly report you file, you must determine the excess wages based on the amounts offered by your state.
In our example for Quarter One we have total wages of $37,000 and excess wages of $100, so the tax due is based on $37,000 minus $100 = $36,900 multiplied by your percentage tax rate (say 2.7% or .027) = $996.30.
For Quarter Two, total wages are $20,000 less excess wages of $15,000 (Mary Smith has reached the required limit) equals total taxable wages of $5,000 for John Smith. Total tax due would be .027 times $5,000 or $135.
In the screenshot to the left, you’ll see the report summary section where you will fill in total wages, less excess wages multiplied by tax rate. Additionally, every state DOL labor report requires timely submissions so you will see there are areas for interest and penalties for late reports—your state will have their own amounts or percentages.
Tips for Reporting
The hardest part of submitting a wage report to your DOL is calculating gross wages and deducting excess wages—especially if you must do it manually. If you have many employees, consider investing in a software payroll program offering state wage report printouts as it will save you valuable time.
Make sure to file your reports on time—do not mail them on the date they are due. Mail them before they are due or as soon as the quarter is complete. If your state offers online filing of wage reports, take advantage of this service and payments can be sent electronically via your company’s bank account. Finally, if you need further information, contact your local DOL for more information.
US Department of Labor State Offices by Zip Code - https://www.dol.gov/dol/location.htm
Blank New Mexico Quarterly Wage Reporting Form - https://www.dws.state.nm.us/pdf/ES903Ajan06.pdf
Jean Scheid has been a business owner for over 17 years and has experience in DOL reports and filing requirements.
Tax - Sxc.hu/YM
Percentage - Sxc.hu/riyasr
Wage Coins - Sxc.hu/iprole
Screenshots of DOL Map and New Mexico forms courtesy of author retrieved from government offices.