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Payroll Withholding Tax Basics for Both Employers and Employees



Requirements regarding withholding payroll taxes are something that every business owner should be familiar with, particularly businesses which handle their own payroll internally (as opposed to outsourcing to a payroll company). Employers are almost always required to withhold taxes from employees’ salaries, wages, and other compensation, such as commissions or bonuses.

While many people think of paying income taxes as what they do when they file tax returns by mid-April of each year, income taxes are actually considered a “pay as you go” tax. The tax returns at the end of the year then adjust the withholdings calculation depending on various other considerations such as deductions, marital status, and other income.

The employer withholds a certain amount of taxes from each paycheck which the employer is then required to turnover to the government.

There are both federal withholdings and New Jersey state withholdings.

For federal withholdings, most people are familiar with W-4 forms. These forms are generally filled out by an employee when she first begins working for a company and then updated as needed or desired throughout the course of the employment. These forms help the employer determine how much should be withheld from an employee’s paycheck. If the information on the W-4 changes, but the form is not updated so that the employer may adjust the withholding, that can cause a greater discrepancy at the end of the fiscal year.

For New Jersey withholdings, generally an employer can use the same W-4 form. However, in certain circumstances, such as if an employee has multiple jobs, that employee may file Form NJ-W4 to get a more accurate withholding. The New Jersey Division of Taxation has a useful table for both employers and employees to calculate their withholdings. However, an employee can always ask that an additional amount be deducted from each paycheck.

A New Jersey employer is required to withhold income taxes from compensation paid to all New Jersey resident employees. The New Jersey employer may also be required to withhold New Jersey income tax for nonresident employees if they physically work in New Jersey. (One exception is Pennsylvania residents who are exempt from New Jersey withholdings when they fill out a form and provide it to their employer.)

An employer must remit these taxes electronically to the State of New Jersey on a weekly, monthly, quarterly, or annual basis which can be made via e-check, credit card, or electronic transfer. The returns illustrating the amounts being withheld must be filed electronically as well on a monthly, quarterly, or annual basis.

An employer which withholds employees’ income taxes is acting as a trustee on behalf of the State. Therefore, if an employer fails to remit the taxes that it was required to withhold, the business’s owners, partners, or officers can be help personally liable for the failure to timely collect and/or remit the taxes. This is true regardless of whether the employer is a sole owner, corporation, or other business entity type. Generally, the penalty for failure to timely fill includes $100 per month penalty, plus five percent of the tax amount due each month. The penalty for late payment of taxes due is also five percent of the amount due, plus an annual interest rate of three percent. Each year that interest is compounded. Moreover, a collection fee of ten percent may also be added to the amount due. Thus, it is extremely important that employer’s pay the correct amounts owed in a timely manner.

McLaughlin & Nardi, LLC’s tax attorneys are experienced with Federal and New Jersey state payroll tax withholding laws, as well as other general business entity laws and regulations. To learn more about what we may be able to do to help, please visit our website, or contact one of our New Jersey lawyers by e-mail or telephone at (973) 890-0004.

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