As an employer, it is important that you understand the difference between hiring an employee and hiring an independent contractor, and your responsibilities with respect to each.
What is the difference between an employee and an independent contractor?
Whether your business hires an employee, or an independent contractor depends on the business relationship between you and the person performing the services.
For purposes of withholding, the Department uses the same definitions as the IRS.
For purposes of contributions to the Health Care Fund, the Department of Taxes uses the ABC Test to differentiate between an employee and an independent contractor. The Department of Labor also uses the ABC test to determine unemployment compensation.
There are other factors to be aware of between an employee or independent contractor when considering other government entities and regulations. Examples of this include but are not limited to the U.S. Department of Labor’s Fair Labor Standards Act, and Vermont’s Wage and Hour Laws.
When I hire a Vermont resident as an employee, am I required to withhold taxes and to report and remit those taxes to the Vermont Department of Taxes?
Yes. When hiring a Vermont resident as an employee, you are required to withhold income tax from their wages and to issue a Form W-2 to them at the end of each calendar year for tax return preparation. There are also times when an employee relocates to Vermont where withholding is required. Find additional information regarding withholding and remittance is available on the Department’s website.
When I hire an independent contractor am I required to withhold taxes?
No. You are not required to withhold and remit taxes on behalf of an independent contractor.
What reporting responsibilities do I have when I hire an independent contractor?
You are required to report payments made to independent contractors to the IRS and to the Vermont Department of Taxes at the end of each calendar year. You must also provide each independent contractor with a 1099-MISC when required. Additional guidance from the IRS can be found here.
What forms do I need to use?
When hiring an employee, you must ask your new hire to complete a Form W-4 and Form W-4VT so that you can withhold the appropriate amount of income tax from their wages, remit those taxes to the Department, and issue a Form W-2 to your employee for their tax return preparation at the end of the calendar year. Additionally, you will want your employee to complete a HC-2 Declaration of Health Care Coverage form to enable proper reporting related to Health Care Fund Contribution Assessment when you file your quarterly withholding reconciliation.
Independent contractors are not required to complete a Form W-4 and Form W-4VT. However, if your business hires an independent contractor, it is advisable to have the independent contractor complete a Form W-9 to allow for issuance of Form1099-MISC when required.
What payments are subject to Vermont Income Tax Withholding?
Wages, pensions, annuities, and other payments are generally subject to Vermont income tax withholding if 1) the payments are 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).
How much tax do I 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.
How often do I need to report and remit withholdings to the Department?
Generally, your payment frequency to Vermont will mirror your Federal payment frequency. For example, if you are required to pay your Federal Withholding Tax semiweekly, you are required to pay the Vermont Withholding Tax semiweekly.
How do I report and remit withholdings to the Department?
Visit our Withholding Tax section for a list of filing methods, forms, and tools to help you get started.
Resources for Employers
The Vermont Attorney General’s Consumer Assistance Program has information on its website with guidance on hiring your first employee.