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The New Mexico Taxation and Revenue Department released the 2020 wage-bracket and percentage method tables for state income tax withholding.(Publication FYI-104, New Mexico Withholding Tax, effective January 1, 2020.)

Employers are required to file calendar year 2019 Forms W-2 with the Department by January 31, 2020. Employers of 25 or more employees must file electronically.

Continued use of federal Form W-4 for 2020

Unlike most other states, New Mexico continues to use the federal Form W-4 for state withholding purposes. New Mexico does not have a state equivalent of the federal W-4 form. As a result, the Department advises that employees should complete a copy of the federal Form W-4 for New Mexico state income tax purposes, writing "For New Mexico State Withholding Only" across the top in prominent letters. Note, however, that it is not mandatory to complete a federal Form W-4 for both the IRS and New Mexico; it is an option utilized when New Mexico withholding elections differ from federal.

Following IRS guidelines, New Mexico employers can have both 2020 Forms W-4 and pre-2020 Forms W-4 on file for their employees depending on when they started employment. Employees hired before 2020 are not required to submit the 2020 Form W-4 if they do not want to change their withholding. However, Publication FYI-104 for 2020 states that employees should use the correct number of withholding allowances if using pre-2020 W-4 forms, even though the federal changes will not allow a personal exemption amount when the employee files the 2020 state income tax return.

Due to changes in federal law to which New Mexico conforms, New Mexico state income tax liability is not reduced based on the number of personal exemptions claimed by a taxpayer. Although the standard deduction amount was increased for all taxpayers, tax liability will likely increase for households with two or more dependents. The withholding tables in the 2020 Publication FYI-104 have been updated to reflect these changes and the change to the federal W-4 by removing withholding allowance deduction amounts from wages. Employees will see an increase in their withholding tax as a result of these changes.

The Department recommends that employers communicate these state withholding changes to their employees. Employees may request that an additional amount of state income tax be withheld for each pay period. This can be requested by employees on a Form W-4 marked "For New Mexico State Withholding Only." The Department recommends that the level of additional withholding for state tax purposes be 30% of any additional federal withholding amount.

Supplemental withholding rate remains the same

If the federal withholding is calculated using a supplemental rate, a flat 4.9% of the supplemental wage or fringe benefit amount should be withheld for New Mexico state income tax withholding purposes. The same method used for calculating federal withholding on irregular or supplemental wages should be used for New Mexico income tax withholding. An employer that uses the cumulative method of withholding for federal withholding may use this same method for New Mexico state income tax withholding.

If an employee has elected married but withholds at a higher single rate for federal income tax withholding, the single rate for New Mexico state withholding purposes must be used.

2019 Form W-2 reporting reminders

As we reported previously, legislation requires that effective with calendar year 2019 Forms W-2 filed in 2020, all employers are required to file Forms W-2 with the Department by January 31, 2020 and employers filing 25 or more Forms W-2 are required to file electronically via the Department's electronic reporting system (TAP). (HB 276, Chapter 59; EY Payroll Newsflash Vol. 19, #062, 3-14-2018.)

Previous law required employers to file Forms W-2 with the Department by February 28 only if quarterly withholding or unemployment tax returns are not filed by the employer. Applicable employers that file 50 or more Forms W-2 are required to file electronically.

The new requirement also applies to payers of pensions and annuities that withhold New Mexico state income tax from such payments.

For more information on state withholding tax and the Publication FYI-330 electronic filing specifications, go here.

New Mexico personal income tax rates revised starting in 2021

As we reported, 2019 legislation (L. 2019, HB6 (c. 270) effective January 1, 2021, revises the personal income tax rates, with the highest tax rate increasing from the current 4.9% to 5.9%. (EY Payroll Newsflash Vol. 20, #121, 8-21-2019.)

Currently, employers can withhold New Mexico income tax at the flat rate of 4.9% on supplemental wages. It is assumed that the supplemental withholding rate for New Mexico state income tax withholding purposes will increase to 5.9% in 2021; however, confirmation is needed from the New Mexico Department of Revenue.

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