New Oregon Wage Withholding Tax

As part of its major transportation bill (HB 2017), the Oregon legislature last week adopted a new statewide wage withholding tax, starting July 1, 2018, to fund public transit projects throughout the state. Every employer will be required to withhold and remit 0.1% (one-tenth of one percent) of an employee’s wages. (For example, if gross pay is $3,000, the tax withheld will be $3.) The new withholding tax will apply in addition to amounts withheld in payment of the employee’s personal income tax.

Some notable points:

• Withholding only. There is no employer-paid component to this tax. The entire tax amount will be withheld from employee wages.
• Resident employees. The tax applies to all wages paid to any employee who is an Oregon resident, regardless of where he or she works.
• Mandatory proration for nonresident employees. The tax also applies to wages paid to any nonresident employee for “services performed in” Oregon. Some employers already pro-rate regular personal income tax withholding for nonresident employees who spend some of their work time in Oregon. To avoid overcharging an employee, HB 2017 appears to require an employer to pro-rate withholding of the new tax based on whether the nonresident employee is working in Oregon rather than another state.
• How to file. The bill allows the Department of Revenue to include the new tax on the same quarterly tax return that Oregon employers already use.
• Who is liable? The bill makes an employer directly liable for any tax that the employer fails to withhold and remit. The bill does not include any mechanism for the state to recover tax from the employee if an Oregon employer fails to withhold. An employee owes the tax directly only if the employee is an Oregon resident who works outside Oregon for an employer that is not doing business in Oregon.
• Penalties. The bill imposes a penalty of $250 per employee (up to $25,000) if an employer knowingly fails to deduct and withhold the tax.
• When does this start? Employers will need to start withholding this tax on wages earned on or after July 1, 2018.
• Where does the money go? HB 2017 dedicates the revenue from the new 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.
• Also applies to retirement plan distributions. The same tax also will apply to distributions from retirement plans, annuities and other “periodic payments.” Please see our separate client alert on that topic here.

Governor Brown has announced that she will sign HB 2017.