If you plan on hiring employees to work in your business, you must withhold Vermont state income tax from each employees paycheck and remit the tax to the Vermont Department of Taxes.
Before you Open for Business
You must register for an employer withholding account. When you register for a Vermont business tax account, be sure to answer the question about hiring employees. If you answer "Yes," then that will prompt the Department to open an employer withholding account for your business.
Determine If You Are Hiring an Independent Contractor or An Employee
It is important that you understand the difference between hiring an independent contractor and hiring an employee. As the employer, you must know when to issue a Form W-2 to an employee as well as withhold income tax from wages or to issue a Form 1099 to an independent contractor.
The Department of Taxes uses the ABC Test, also used by the Department of Labor to determine unemployment compensation. The Department of Labor explains the ABC Test in detail. Please note: The IRS uses different definitions.
Determine Which Payments Are Subject to Vermont Income Tax Withholding
Wages, pensions, annuities, and other payments are generally subject to Vermont income tax withholding if the payments are 1) subject to federal tax withholding and 2) the payments are made to:
- a Vermont resident or
- a nonresident of Vermont for services performed in Vermont
Please note: For information on wages or payments subject to federal withholding tax, see IRS Publication 15 (Circular E).
The IRS determines how often you must deposit withholding payments—semi-weekly, monthly, quarterly, or annually. In addition, you must file quarterly and annual reconciliations with the Department of Taxes.
How Much To Withhold From An Employee’s Paycheck
The Department publishes a guide with withholding instructions, tables, and charts. Review the withholding tables to determine the correct amount to withhold from your employee’s paycheck.
Filing Your Return
Go to our Withholding Tax section for a list of filing methods, forms, and tools to help you get started.
The Vermont Attorney General’s Consumer Assistance Program has information on its website with guidance on hiring your first employee.
Health Care Fund Contribution Assessment
As an employer, you are responsible for paying the Health Care Fund Contribution Assessment (HCFCA) for your employees under the following circumstances:
1) You do not offer health care insurance to any of your employees.
2) Some or all of your employees are considered “uncovered” by insurance under the HCFCA guidelines.
Employers report and pay the HCFCA on Form WHT-436, Quarterly Withholding Reconciliation.