by John Schachter, EA
Employers with a Massachusetts workforce are required to implement an additional state payroll tax starting October 1, 2019. The tax is to pay for benefits that workers will be able to claim for family and medical leave starting in 2021. Employers must withhold the new tax from all employees.
Before then, you must put up a workplace poster and get written acknowledgment from each worker that you have notified them of the benefits they will be entitled to under the new law. If you have 25 or more workers, your business must contribute additional tax, over what you withhold from worker pay. And in some cases, you must withhold or deposit tax with respect to independent contractors, not just employees.
The Massachusetts Department of Revenue has built out a website to help employers comply with the new law. There, you can download the workplace poster and get official versions of the required notice for your workers, among other things.
How much tax? If you have fewer than 25 covered individuals, you withhold from worker compensation 0.378% of the first $132,900 paid each person. That’s not 3.78% but 0.378%.
If you have 25 or more covered individuals, your business must contribute to the tax, over and above what you withhold from the workers. You contribute an extra 0.372%. So that’s 0.75% all in for the bigger businesses.
If you work with a payroll service, they should help you meet these requirements. However, as discussed below, if you pay independent contractors, it can change your responsibilities under the new law. And the payroll service probably doesn’t know about them.
You determine your count of covered individuals based on the average number of Massachusetts workers getting paid for each pay period in 2018. The Massachusetts website has a worksheet for how to figure the average count of employees.
You must include certain independent contractors in your count if such contractors amounted to more than half of your Massachusetts workforce last year.
If, indeed, contractors were more than half of the workforce, then the contractors are covered individuals. You will need to withhold the new tax from their compensation and, if your business is big enough, you will need to deposit tax on their account.
You don’t have to count all contractors for this test. You only count those doing business as individual entities, i.e., no partnerships or corporations or LLCs. And you can further exclude from the count (and from withholding) individual workers who pass all parts of the following three-part test:
- work outside of your direction and control
- perform a service outside the usual course of your business
- have their own, independent trade or business doing that kind of work
So, unless you are a painter, the painter you hired to redo your office does NOT count, because she works outside your direction and control, hers is not your usual course of business, and she has her own independent trade doing that kind of work.
But a freelance writer creating content for a magazine probably does count: even if she isn’t under the editor’s direction and control, and even if she has her own, independent business as a writer, her service is not outside the usual course of a magazine’s business.
There are some less-common categories of contractor who are also excluded. Check out the Massachusetts website for that list.
It seems weird to hold back a tax from pay to a freelancer, but that is just what is required under the new law.
Lots of self-employed people have zero employees. They only have contractors. Unless an exception applies, they will need to withhold from compensation paid to their individual contractors starting October 1st.
Taxes due under the new program will need to be remitted to the Massachusetts Department of Revenue by Jan 31, 2020. You will deposit the tax via the Mass TaxConnect website, just as you may already do for other state tax types.
Questions? Ask John Schachter + Associates how to implement this new law for your business.