New Oregon Withholding Tax on Periodic Payments

As part of its major transportation bill (HB 2017), the Oregon legislature last week adopted a new statewide payroll tax that also applies to “periodic payments,” starting July 1, 2018. The new tax will fund public transit projects throughout the state. Every payer of a periodic payment from employer deferred compensation plans (such as qualified retirement plans), individual retirement plans (such as individual retirement accounts or individual retirement annuities) or commercial annuities (including life insurance contracts) will be required to withhold and remit 0.1% (one-tenth of one percent) of each gross periodic payment. (For example, if the gross payment is $2,000, the tax withheld will be $2.) The new withholding tax will be mandatory. Unlike the regular income tax withholding rules that permit the recipient to elect to have no income taxes withheld from such periodic payments, the recipient will not be allowed to elect to have no withholding apply to this new payroll tax.

Some notable points:

• Periodic Payments. Periodic payments include annuity or similar periodic payments (such as certain installments) but do not include lump sum payments.
• Withholding only. The entire tax amount will be withheld from the periodic payment. There is no separate tax on the payer.
• Who is liable? The bill makes a payer directly liable for any tax that the payer fails to withhold and remit. The bill does not include any mechanism for the state to recover tax from the recipient if the payer fails to withhold.
• Penalties. With respect to the payroll tax on wages, the bill imposes a penalty of $250 per employee (up to $25,000) if an employer knowingly fails to deduct and withhold the tax. However, the bill does not explicitly impose any new penalties on a payer of a periodic payment.When does this start? Payers will need to start withholding on periodic payments made on or after July 1, 2018.
• Where does the money go? HB 2017 dedicates the revenue from the new withholding tax to public transportation improvement projects (except light rail) as determined by the Oregon Transportation Commission. Published estimates show that the combined payroll and periodic payment tax will raise more than $125 million per year.
• Wage withholding counterpart. The same bill imposes the same withholding tax on all Oregon wages, which would include periodic or other payments from certain nonqualified deferred compensation plans. For an explanation of the wage component of the withholding obligation, please see our separate client alert here.

Governor Brown has announced that she will sign HB 2017.

Many employers (and their employees who act as or on behalf of the plan administrator) delegate to third party record keepers or payment agents to the responsibility to make payments and withhold taxes on behalf of their employer deferred compensation plans. Once the bill is signed into law, employers may want to reach out to their third party vendors to ensure that they are aware of the new Oregon requirement and will have systems in place to comply by the July 1, 2018 implementation date.