Connecticut employers entered August in a scramble to comply with the state”™s new income tax withholding tables, which include a retroactive “catch-up” provision that will dock workers additional amounts in coming months to cover taxes owed for the first half of 2011.
Even Rey Giallongo Jr., who has spent much of the past year readying for the July kickoff of the 2,000-plus page Dodd-Frank financial reform act, is mildly daunted by the complexity of adjusting payrolls for his First County Bank under Connecticut”™s new income tax regime.
“We are looking really closely at it,” said Giallongo, who last month was promoted to chairman and CEO of First County Bank in Stamford.
Connecticut is rolling out the largest number of new tax increases in recent history, according to Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services, who discussed the changes in a video segment with the Connecticut Business & Industry Association”™s CBIA Business Minute.
“Not only is the income tax dramatically changed, but we”™re going to do catch-up,” Sullivan said. “We”™re going back to January, so the reality for folks is that they”™ve got ”“ in about five months ”“ 12 months of taxes to catch up under the new rates.
“People need to plan ahead for that,” Sullivan added. “The alternative is not to plan ahead for it and then we get around to April and ”“ surprise ”“ you have a huge tax bill to catch up with.”
In addition to the current 3 percent, 5 percent and 6.5 percent brackets, Connecticut has added brackets taxing 5.5 percent, 6 percent and 6.7 percent of income. The income level at which one can take the 3 percent tax is being lowered and marginal rates are being raised at which a resident is exposed to the full percentage of a tax in a specific bracket.
Employers and entrepreneurs additionally must compute “catch-up” withholding amounts owed for the current tax year. DRS has revised its 2011 withholding tables to reflect the additional income-tax brackets, with amounts being spread out for the remainder of the year beginning on Aug. 1.
If that sounds easy, consider that for any employee who was previously classified in the state”™s former 3 percent tax bracket, employers must:
- calculate the employee”™s annualized taxable income;
- compute the 2011 Connecticut income tax on the annualized taxable income applying the new rates;
- factor in the 3 percent phase-out provision and the “recapture tax” provision;
- subtract the year-to-date withholding amount from the calculated 2011 Connecticut income tax; and
- divide the difference by the remaining pay periods for 2011.
Got all that? If not, DRS offers examples on its website for an employee making $55,000 or $270,000 ”“ comprising 17 steps each.
Even as Connecticut businesses put in extra work on the new withholding tables, the state is pushing ahead with its annual sales tax holiday Aug. 21-27, scheduled to coincide with back-to-school shopping. The freebie could have more meaning this year, given Connecticut”™s elimination of a former sales-tax exemption on clothing purchases under $50.
New York sparked the sales tax holiday trend in 1997 as a way to discourage cross-border shopping, according to the Washington, D.C.-based Tax Foundation, which counted 16 states holding sales-tax holidays this year, down from a peak of 19 states in 2010. No other Northeast state made the Tax Foundation census of participating states this year, with Massachusetts ending its own holiday after hiking its sales tax in 2009 from 5 percent to 6.25 percent.
