While the District of Columbia isn’t technically its own state yet, it functions like one in terms of payroll tax requirements for employers. In addition to D.C. income tax withholdings, employers need to pay unemployment tax, family leave tax, and administrative funding tax based on their employees’ earnings.
Make sure you know what you’re doing when running payroll in the District of Columbia by following these steps.
How to Set Yourself Up for a Successful Payroll Run in the District of Columbia
Before you ever touch payroll for your D.C. business, take some time to familiarize yourself with everything that D.C. requires of employers, including registering their business properly, reporting new hires, and paying the right taxes on time.
I’ve broken down everything you need to know to help you prepare for a successful payroll run in D.C.
1. Register Your Business
After you set up your business federally and apply for a Federal Employer Identification Number (FEIN), you’ll need to register your business with D.C. to be eligible to withhold and pay taxes.
Do that through the Office of Tax and Revenue’s MyTax DC portal. During the registration process, you’ll complete Form FR-500 online, which creates your business registration.
Next, register an account with the Department of Employment Services Portal (DOES) to get an assigned employer identification number (EIN) for D.C. You’ll need this number when filing your payroll taxes, paying contractors, and paying your business taxes.
If you use a payroll servicer to handle your payroll, you’ll also be required to provide details about it after registering your business with DOES.
The DOES portal is also where you’ll file and pay your D.C. unemployment, administrative funding, and family leave taxes, so there are no additional steps you have to take for tax purposes.
However, businesses must register with the District of Columbia Directory of New Hires to be able to report employees when they’re hired.
2. Notify D.C. of Your New Hires
All new hires in D.C. must be reported by employers within 20 days of getting hired or re-hired. The Directory of New Hires maintains a database accessible by D.C.’s child support services to assist with enforcing child support orders.
With every new hire report, you’ll need to include the employer’s FEIN, name, and address, and the employee’s name, address, Social Security number, and the first date of their paid services.
You don’t have to report each new hire separately if they start on different dates, so long as you’re meeting the 20-day requirement. For example, if you have three employees who start on January 5th, 8th, and 10th, you can wait until the 10th to report them all.
D.C. allows electronic reporters to make two monthly reports of all new hires no more than 16 days apart, ensuring that they meet the 20-day requirement.
Also, have your new hires fill out Form D-4 DC, which reports an employee’s withholding allowances. Every employee needs this form on file in addition to federal forms I-9 and W-4.
3. Calculate, File, and Pay D.C. Payroll Taxes
D.C. has four types of payroll taxes you need to remember when running payroll. Income tax comes out of employee paychecks, while administrative funding, family leave, and unemployment taxes are solely the responsibility of the employer.
Income Tax
Income tax rates for D.C. range from 4% to 10.75% and are based on the employee’s taxable wages, which are their gross wages minus any deductions they’re eligible for. Use Form D-4 DC and Form W-4 to determine the employee’s taxable annual wages with deductions.
Then, use the D.C. tax rate schedule to calculate the employee’s tax rate.
For example, an employee making $100,000 in taxable wages gets taxed at $3,500 plus 8.5% of the excess over $60,000:
- $100,000 – $60,000 = $40,000
- $40,000 x 0.085 = $3,400
- $3,400 + $3,500 = $6,900
Finally, divide the final figure by the number of pay periods for that employee. If they get paid biweekly, they have 26 pay periods. $6,900 / 26 = $265.38 in D.C. taxes per pay period.
Be sure to make adjustments through the year if the employee gets a raise, earns commissions, decreases their hours significantly, or has any other changes that could affect their earnings.
Use the MyTax DC portal to file and pay your taxes. Annual filers must pay by January 20th of each year, while quarterly filers pay by the 20th day of the month following the end of the reported quarter.
Unemployment and Additional Employer Taxes
D.C. employers pay an unemployment tax based on the first $9,000 in earnings for each employee per year. New employers are taxed at 2.7%, but tax rates for other employers range between 1.9% and 7.4%.
If you’re a new employer, you will pay $243 annually for each employee making at least $9,000 ($9,000 x 0.027). This is paid by you as the employer rather than withholding it from your employees’ pay. D.C. updates your rate each year.
However, D.C. also imposes a 0.2% administrative funding tax on employers to help fund the administrative side of D.C.’s unemployment system for a maximum of $18 per employee each year.
There’s also a family leave tax of 0.26% of all gross wages paid to employees for any businesses required to pay unemployment taxes. This supports the paid family leave program.
As an example, you’d pay $260 per year for an employee making $100,000.
File and pay the family leave tax and administrative funding tax with your unemployment taxes.
File and pay the tax quarterly for all quarterly unemployment taxes due by April 30th, July 31st, October 31st, and January 31st using the DOES portal.
The Best Way to Run Payroll in the District of Columbia
Payroll compliance isn’t an option; it’s a non-negotiable.
Various aspects of payroll, like PTO laws, income tax withholding, and PTO payouts, vary by state, D.C. included, and businesses have the onus to understand and follow each law for every state they operate in.
Instead of running payroll manually, invest in payroll software as soon as you can afford to. Many of these tools offer start-small plans for businesses with a few employees, allowing it to scale alongside your business.
Here’s what payroll software can do for you:
- Calculate gross wages based on time cards
- Adjust pay rates
- Report new hires
- Organize payroll records
- Calculate, file, and pay payroll taxes
- Notify you of any upcoming due dates or tasks you need to do manually
- Provide payroll records
- Streamline the onboarding process
- Handle multi-state payroll
If it seems like payroll software could save you a lot of time running payroll in D.C., you’re right. Time and headaches, if I’m being honest.
Check out our guide to payroll software to compare different tools and find the right one for your business needs.
