What Wages Are Subject to Withholding in MA?

Massachusetts requires employers to withhold state income tax from employee wages, a process necessary for both employers to maintain compliance and for employees to meet their tax obligations. The requirement lies in understanding which forms of compensation are considered “wages” under state law. Properly identifying taxable wages ensures that the correct amount of tax is collected and remitted to the Massachusetts Department of Revenue. This system of pay-as-you-go taxation prevents employees from facing a large tax bill at the end of the year.

Defining Taxable Wages in Massachusetts

For employers, determining which payments are subject to withholding starts with a broad definition. Massachusetts generally aligns its definition of taxable wages with the federal definition found in the Internal Revenue Code. This means if a payment is considered a wage for federal income tax withholding, it is also a wage for Massachusetts withholding purposes. This alignment simplifies the process for many businesses.

The most common forms of compensation fall into this taxable category. Regular salary and hourly pay are always subject to withholding. Supplemental payments are also included, such as bonuses, commissions, and any retroactive pay adjustments. Payments for time off, including vacation pay and most forms of sick pay, are treated as wages and must have taxes withheld.

Common Exclusions from Withholding

While the definition of wages is broad, certain payments and benefits are excluded from Massachusetts withholding requirements. A significant exclusion involves employee contributions to qualified retirement plans. When an employee directs a portion of their pre-tax salary into a 401(k) or 403(b) plan, those amounts are not considered part of their taxable wages for state withholding purposes at that time. This deferral lowers the employee’s immediate taxable income.

Another exclusion applies to employee payments for certain health benefits under a federally qualified Section 125 cafeteria plan. Pre-tax deductions for health insurance premiums, dental coverage, and contributions to a Health Savings Account (HSA) reduce an employee’s gross wages before withholding is calculated. Reimbursements for business expenses made under an accountable plan are also not considered wages. An accountable plan requires employees to substantiate their business-related expenses and return any excess reimbursement.

Special Categories of Payments and Benefits

Certain types of compensation have unique withholding rules. Taxable fringe benefits, for instance, represent non-cash compensation that must be valued and included in an employee’s income. A common example is the personal use of a company vehicle, where the value of that personal use is added to the employee’s wages for tax purposes. The value of employer-provided group-term life insurance coverage exceeding $50,000 is also a taxable fringe benefit.

Severance pay, which is compensation paid upon termination of employment, is considered a wage and is subject to Massachusetts withholding. Tips and gratuities are another special category. Employers are responsible for withholding income tax on all tips that employees report to them. Payments made by a third party for sick pay, such as through an insurance policy, may also be subject to withholding, often coordinated between the third-party payer and the employer.

Withholding Rules for Different Worker Classifications

An employer’s obligation to withhold taxes is tied to the classification of the individual performing the services. The distinction is between an employee and an independent contractor. Massachusetts withholding requirements apply only to wages paid to employees. Payments made to independent contractors are not subject to withholding, and misclassifying an employee can lead to significant penalties.

The location where work is performed also impacts withholding. Employers must withhold Massachusetts income tax from wages paid to non-resident employees for services performed within the state. Conversely, Massachusetts residents who work for a Massachusetts employer but perform services in another state are still subject to Massachusetts withholding. The state does not have reciprocal agreements with other states, which means there is no automatic exemption from withholding for residents working elsewhere.