North Dakota Withholding Tax Requirements
Effectively manage your North Dakota withholding tax obligations. This guide clarifies an employer's role in the state's employee tax remittance process.
North Dakota withholding tax is a system for collecting state income tax from employee earnings throughout the year. Employers deduct and hold this tax from employee paychecks. This process functions as a pay-as-you-go method, ensuring that employees meet their state income tax obligations gradually with each pay period. The collected funds are then periodically remitted by the employer directly to the state.
Determining Withholding Requirements
An employer is subject to North Dakota’s income tax withholding requirements when two conditions are met. First, wages must be subject to federal income tax withholding. Second, the employer must pay wages to an employee performing services in North Dakota or to a North Dakota resident performing services outside the state. The definitions for “employer,” “employee,” and “wages” align with those used by the Internal Revenue Code.
An exception exists for North Dakota residents working in other states. If an employer is already required to withhold income tax for another state where the resident employee is working, they are not required to also withhold North Dakota tax from those wages. Wages paid to nonresident aliens for services performed in North Dakota are also subject to state withholding if they are subject to federal withholding.
Employers must distinguish between an employee and an independent contractor. Withholding is required for employees, but this responsibility does not apply to independent contractors, who manage their own tax payments. Wages paid by a farmer or rancher are also exempt from state withholding if they are exempt from federal withholding.
Required Information and Employee Forms
Employers must collect a completed federal Form W-4, Employee’s Withholding Certificate, from each employee. North Dakota uses this federal form to determine state withholding, as the information on it, such as filing status and dependents, is used to determine the correct amount of tax to deduct. An employee may also use the form to request an additional dollar amount to be withheld or claim an exemption from withholding if they had no tax liability in the prior year and expect none in the current year.
For employees who are residents of Minnesota or Montana and work in North Dakota, a special rule applies. These individuals can complete Form NDW-R, Reciprocity Exemption from Withholding for Qualified Residents, to claim an exemption from North Dakota’s withholding. This is due to reciprocity agreements between the states, which allow residents to pay income tax only to their home state.
Calculating and Depositing Withheld Tax
Once an employee’s withholding information is established, the employer must calculate the tax. North Dakota provides two primary methods for this calculation: the wage bracket method and the percentage method. The state publishes tax tables and withholding guides to assist employers, and the wage bracket method involves finding the employee’s wage range in the tables for the correct pay period and filing status to identify the withholding amount.
The percentage method requires the employer to subtract the value of the employee’s claimed allowances from their gross wages for the pay period. The resulting figure is then used with the percentage rate tables that correspond to the employee’s filing status and pay frequency to compute the tax. This method is often integrated into payroll software, which automates the calculation process.
After calculating and withholding the tax, employers must deposit the funds with the state according to a specific schedule. The required frequency of these deposits—either quarterly or annually—is determined by the total amount of tax withheld in a lookback period. Employers who withheld $1,000 or more in the prior calendar year are required to file and pay on a quarterly basis, while those who withheld less than $1,000 may be eligible to file and pay annually.
Filing North Dakota Withholding Returns
The process of reporting and remitting withheld taxes involves filing periodic returns with the North Dakota Office of State Tax Commissioner. Most employers are required to file Form 306, the North Dakota Income Tax Withholding Return, on a calendar quarter basis. This form summarizes the total wages paid and the total state income tax withheld during that quarter, and a return must be filed for each period even if no wages were paid or no tax was withheld.
Employers have options for submitting their returns and payments, though the state encourages electronic filing through its online portal, the North Dakota Taxpayer Access Point (ND TAP). Electronic filing is mandatory for employers who were required to withhold $1,000 or more in the previous year or for those who use a third-party payroll service that files federal taxes electronically. Paper forms are available for those who do not meet the electronic filing mandate.
At the end of the calendar year, employers must perform an annual reconciliation. This involves filing Form 307, the North Dakota Transmittal of Wage and Tax Statement, by January 31 of the following year. This form summarizes the total withholding reported on the quarterly Form 306 filings for the entire year. Along with Form 307, employers must submit copies of the federal Form W-2 for each employee.
The employer is also responsible for providing each employee with their Form W-2 by the January 31 deadline. This form details the employee’s total annual earnings and the amount of federal and state income tax that was withheld.