Vermont Child Care Contribution tax enacted

Beginning July 1, 2024, employers and employees in Vermont will be liable for a new Child Care Contribution withholding tax. Vermont will be the first state to mandate withholding for child care purposes.

Vermont’s legislature passed the bill creating the new withholding tax after overriding a veto from Gov. Phil Scott, who said raising revenue for child care from taxes and fees “should be a last resort, not a first step.”

The wages against which the tax will be withheld will be wages subject to federal income tax withholding. The contribution rate will be 0.44 percent of each employee’s covered wages. Employees will pay 25 percent of this rate, or 0.11 percent, with employers paying the remainder. Employers will be responsible for the full amount of any unpaid contributions.

Self-employed individuals — sole proprietors or partner owners of an unincorporated business, sole members of a limited liability company or sole shareholders of a corporation — will pay 0.11 percent on their self-employment income.

Employers will remit the contributions as if the contributions were withheld income taxes, according to the following schedule:

• Employers that reasonably expect to withhold more than $9,000 during the calendar quarter must deposit semiweekly.
• Employers that reasonably expect to withhold more than $2,500 but less than $9,000 during the calendar quarter must deposit monthly.
• Employers that reasonably expect to withhold up to $2,500 during the calendar quarter must deposit quarterly.

An open question is whether employers will be required to count the child care contributions toward these withholding limits. It is anticipated that Vermont will revise its quarterly reconciliation return, Form WHT-436, to reflect this new withholding requirement.

Employers will be able to deduct their portion of the payroll tax contribution as an expense when filing their taxes, but some shifting between wage and non-wage compensation could occur.

The withheld child care contributions will be transferred to a dedicated Child Care Contribution Special Fund, to be administered by Department of Children and Families and the Department of Taxes, and may be used to expand subsidies in the state’s Child Care Financial Assistance Program. This program provides financial assistance to Vermont residents for child care, based on a family’s income.