Payroll Oklahoma, Unique Aspects of Oklahoma Payroll Law and Practice
In Oklahoma, everyone must file a State Income Tax return with the Oklahoma State Department of Revenue (OSDR) each year. If you are an individual or a sole proprietor, you are required to file a tax return if your gross income in any year is greater than $12,000. In addition, if any other person is entitled to claim you as a dependent on their tax return for federal purposes (and does not instead elect to treat that person as your spouse), then you too MUST file an Oklahoma tax return even if the sum of gross income and total expenses do not exceed $12,000 in any given year. Even if the gross income and total expenses are less than $12,000, however, it may still be advantageous to file a tax return to claim the refundable Oklahoma First time Home Buyer's Credit (discussed below). The same types of rules and provisions apply to LLCs that have members.
Oklahoma has a withholding exemption similar to that of federal income tax, which permits you to subtract $4,150 from State wages for each exemption claimed on your federal income tax return. In addition to a federal exemption, Oklahoma offers three additional exemptions that can be subtracted from gross State income when determining your State tax liability. Those exemptions are the following:
The standard deduction is subtracted after all other deductions have been applied.
The Taxpayer Relief Act of 1997 simplified the computation of Oklahoma income tax. Prior to 1997, certain taxpayers were required to file an Oklahoma income tax return (known as an IT 1040) even if their gross income and total expenses did not exceed $12,000 for the year. The Taxpayer Relief Act eliminated this requirement, although certain taxpayers may still be required to file an IT 1040 if they do not have a qualifying dependent in the State.
Oklahoma Taxable Income consists of taxable income from sources within and outside of the State plus income from sources within Oklahoma plus exempt income.
Gross Income from Oklahoma sources or from sources outside of Oklahoma. This can include income from wages, business interests, pension distributions and annuities, prizes and awards.
Gross Income from sources within Oklahoma can include interest on bank deposits, retirement income received by a resident of the State that was properly sourced elsewhere as well as dividends and other investment income. In addition, any exempt interest earned in connection with a security issued by the State of Oklahoma or its political subdivisions is not included in gross income from Oklahoma sources.
All other types of income including those that are not taxable in the first place (such as gifts and inheritances) are classified as exempt income.
In Oklahoma, the "net income" tax is based upon taxable income computed without regard to any item of deduction. In other words, if an item may be deducted on your Oklahoma tax return (such as a business expense), the amount of that deduction is added back to gross income when computing taxable income. Once taxable income has been determined, subtract the standard deduction, exemption deductions and any other allowable deductions from gross taxable income and then use the resulting figure as the basis for calculating your tax liability.
Oklahoma imposes upon residents and nonresidents who are temporarily present in the State a tax of five percent (5%) on all taxable interest and dividend income received during any given year. That rate increases to seven percent (7%) if an individual's gross income from sources within the State during any year exceeds $12,000 and eight percent (8%) if it exceeds $15,000. If neither of the foregoing thresholds are met then the 5% rate will apply to all taxable interest and dividend income received in Oklahoma.
An individual who is considered a resident or nonresident of Oklahoma is taxed at the same rates as a resident or nonresident during any given year even though he or she may have been classified differently in prior years. In addition, an individual who becomes a resident or non-resident within a given year is taxed at the same rates as someone who was classified as such for the entire year.
An individual who is married and files a joint return with his or her spouse will be considered as a resident if he or she has maintained Oklahoma as his or her permanent residence for the entire taxable year. If they reside in Oklahoma for only part of the year and their tax home is still permanently located outside of the State, then they will be considered nonresidents.
A person who becomes divorced during a given year may remain a resident of Oklahoma even after his or her marriage has been terminated if he or she continues to maintain Oklahoma as his permanent residence and/or spends more than 183 days in the State during any given year. Otherwise, such a person will be considered a nonresident.
If you are divorced during the year and are legally obligated to pay alimony to your former spouse, then you may deduct such amounts from your gross income when computing taxable income without regard to whether or not you were classified as a resident or nonresident of the State during the year.
If you are self-employed or an independent contractor, then the total value of all taxable interest and dividend income received in Oklahoma (as well as other items of gross income) will be added together and placed in a category known as "Net Self Employment Income". The total amount of net self employment income is then multiplied by 6.65% (5% plus 1.65% state tax rate on unemployment compensation) to arrive at your State taxable income.
If you have taxable Social Security benefits that are sourced to Oklahoma, then you may subtract an amount equal to $3,500 from your total net self employment income before arriving at the figure used in the calculation of your State tax liability.
If you were a resident of Oklahoma for part of the year and a nonresident for another part of the year, then you will be allowed to file either form 737 or 738 depending on when Oklahoma was considered your home State. If you file form 737 then you will be taxed as a resident during the period of time that Oklahoma was your home state and as a nonresident during the period when it was not. You may also use form 738 if you were neither a resident nor a nonresident of Oklahoma during the entire year. If you file form 738 then no tax is due in that year unless your gross income exceeds $12,000 or more.
The IRS has announced that, beginning with 2008 tax returns, taxpayers are required to complete income tax returns using either Form 1040 (U.S. Individual Income Tax Return) or Form 1040A (U.S.
Conclusion
Oklahoma does not have a state income tax and does not impose any tax upon its residents who are physically present in the State for less than 183 days during the year. However, Oklahoma does impose a tax upon its residents based on all of their taxable income from sources within the State as well as from other States. Nonresidents are subject to Alabama taxes if they spend more than half of the year in the State and/or have personal or business contacts with Oklahoma or its political subdivisions. The tax base in Oklahoma is entirely dependent upon gross income and deductions made by taxpayers on their federal returns.