The Oklahoma State Tax Commission (OTC) released the state income tax withholding tables for tax year 2017. A reproduction of the 2017 annual percentage method is in the Attachment. (Packet OW-2, Oklahoma Income Tax Withholding Tables, December 2016.)

The maximum withholding rate decreased to 5.0% beginning for calendar year 2016 through the elimination of the top income tax bracket. Legislation enacted in 2014 will gradually lower Oklahoma's top income tax rate to 4.85% over several years. The cuts are dependent on revenue triggers, meaning general revenue in Oklahoma must see an increase before the cuts take effect. (SB 1246, signed by the governor on April 28, 2014.)

SB 1246 reduced the top personal income tax rate from 5.25% to 5.0% in tax year 2016 because the general revenue target was reached. If revenue growth continues, the rate will drop again to 4.85%, but no sooner than 2018.

Supplemental wages

The supplemental rate of income tax withholding continues at 5.0% for 2017, the highest applicable rate.

Treatment of supplemental wages combined with regular wages

An employer who pays supplemental wages combined with regular wages and does not specify or separate the amount of each should withhold income tax as if the total payment were a single payment for a regular payroll period. Supplemental wages include bonuses, commissions, overtime pay, vacation pay, sick leave pay, back pay, retroactive wage increases or payment for nondeductible moving expenses.

Treatment of supplemental wages paid separately or combined in a single payment.

Supplemental wages that are paid separately or combined in a single payment with the amount of each specified are subject to withholding according to one of the following methods:

1. If the employer withholds tax from the regular wages use one of these two methods for supplemental wages:

(A) Withhold at the highest applicable rate for the taxable year (5.0% for 2017)
(B) Add the supplemental and regular wages for the most recent payroll period. Calculate the tax as if the total constitutes a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages.

2. If tax was not withheld from an employee's regular wages, the provisions in (1)(B) above should be used. This situation would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages.

Treatment of overtime, vacation and sick pay.

Overtime pay, vacation pay and sick pay are subject to withholding tax as if they were a regular wage payment. If paid in addition to the regular wage, they are considered a supplemental wage. (Oklahoma Tax Commission Rule Section 710:90-1-6.)

Employers must file annual reconciliation and Forms W-2 for calendar year 2016 by February 28, 2017

As we previously reported, legislation enacted earlier this year (HB 2775) requires that employers electronically file an annual withholding tax reconciliation return and corresponding Forms W-2 by the February 28 following the tax year. The change is effective for calendar year 2016, with the annual reconciliation and Forms W-2 due by February 28, 2017.

At this time the OTC does not plan to conform to the new federal Forms W-2 deadline of January 31.

Employers or their payroll providers are required to use Oklahoma Taxpayer Access Point (OkTAP) to either upload files or manually enter the information directly into OkTAP using a modified EFW2 format.

Paper forms and magnetic/optical media (i.e., flash drives, diskettes, CDs) and Form G-141, OTC — Transmittal of Magnetic Media Tax Return will not be accepted. Those that are received will be returned and considered not filed. Penalties may apply.

See the OTC's W-2 and W-3 FAQs for more information. Employers unable to meet the February 28, 2017 deadline or who have questions should contact the OTC at W2ExtensionRequest@tax.ok.gov.

The OTC will release more detailed information to its website over the next few months.

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ATTACHMENT

Percentage method withholding tables