New Jersey Self Employment Tax: An Overview

This article explains the New Jersey state tax obligations for self-employed individuals, freelancers, and independent contractors. A common point of confusion is the idea of a state-level “self-employment tax.” New Jersey does not have a tax that directly mirrors the federal Social Security and Medicare taxes paid by the self-employed. Instead, the state taxes the income earned from self-employment activities through its Gross Income Tax.

New Jersey Taxes for the Self-Employed

For self-employed individuals in New Jersey, the primary state tax obligation is the New Jersey Gross Income Tax. This is a graduated tax, meaning the rate increases as income rises, with rates ranging from 1.4% to 10.75%. This income is reported on your personal state tax return, Form NJ-1040.

If you have established a limited liability company (LLC) and elected to be taxed as an S-corporation, you are required to pay yourself a reasonable salary. This salary is subject to withholdings for state unemployment insurance (SUI) and disability insurance (DI), similar to any other employee. These contributions are separate from the income tax paid on the remaining profits that pass through to you as a shareholder.

Another consideration for some business structures is the Pass-Through Business Alternative Income Tax (BAIT). This is an elective tax that partnerships and S-corporations can choose to pay. The BAIT is paid by the entity itself on the sum of each owner’s share of distributive proceeds and can provide a workaround to the federal limitation on the state and local tax (SALT) deduction.

The state also imposes a sales tax of 6.625% on most tangible goods and certain services. If your business involves selling such items, you must register with the Division of Taxation, obtain a Certificate of Authority, and collect and remit this tax.

Calculating Your Net Profit for New Jersey Tax

The foundation of your New Jersey income tax liability is your “net profits from business,” which is calculated on Schedule NJ-BUS-1, Business Income Summary Schedule. The process begins with your gross receipts, which is all income generated from your business before any expenses are taken out. From this total, you subtract the ordinary and necessary costs of running your business to arrive at your net profit.

To determine your net profit, you must first complete the relevant federal form, typically Schedule C, “Profit or Loss from Business.” New Jersey uses the federal calculation as a starting point but requires several specific adjustments. Common deductible expenses, similar to federal rules, include costs like advertising, office supplies, rent for your business location, utilities, and insurance.

New Jersey’s rules for deductions have important differences from federal regulations that must be applied on Schedule NJ-BUS-1.

• The state allows for the deduction of the remaining 50% of business meal expenses that were disallowed on your federal return.
• Contributions made to a self-employed 401(k) plan are deductible for New Jersey purposes.
• The state has its own set of rules for depreciation that may not conform to federal methods, requiring a separate calculation on Worksheet GIT-DEP.
• You must add back any deductions taken on your federal Schedule C for taxes that were based on income.

After making all New Jersey-specific adjustments, the resulting figure on Schedule NJ-BUS-1 is your net profit for state tax purposes. If your calculation results in a net loss, you cannot report a negative amount on your return; you enter zero for business income.

Paying New Jersey Estimated Taxes

The New Jersey Income Tax system operates on a “pay-as-you-go” basis, meaning you are responsible for paying tax on your income as you earn it. This is accomplished by making quarterly estimated tax payments. This requirement is triggered if you anticipate owing more than $400 in New Jersey income tax for the year after accounting for any withholdings or credits.

Failure to pay enough tax during the year through estimated payments can result in interest charges on the underpaid amount. For a calendar-year filer, payments are due on April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or a legal holiday, the payment is due on the next business day.

The New Jersey Division of Taxation encourages online payments, which can be made directly from a bank account via e-check or by credit card, though a processing fee applies to card payments.

Alternatively, you can pay by mail by completing Form NJ-1040-ES, the Declaration of Estimated Tax voucher. You must mail this voucher along with a check or money order made payable to “State of New Jersey – TGI” to the address specified on the form. It is important to write your Social Security number on the check to ensure it is applied to the correct account.

Filing Your Annual New Jersey Income Tax Return

At the end of the tax year, all of your financial activities are consolidated on your annual New Jersey income tax return, Form NJ-1040. This filing reconciles the total tax liability for the year with the amount you have already paid through estimated tax payments.

The NJ-1040 aggregates your business profit with any other sources of income you may have. After reporting all income, you will claim any applicable deductions and exemptions to arrive at your New Jersey taxable income. The tax is then calculated based on the state’s graduated rate tables.

You must report the total amount of the estimated tax payments you made throughout the year. This sum is entered on a specific line and is subtracted from your total calculated tax liability. If your estimated payments are less than your total tax, you will owe the remaining balance. If your payments exceeded your total tax, you are entitled to a refund or can apply the overpayment to the next year’s estimated taxes.

The state provides a free online filing service, or you can use approved tax software or a paid tax professional to e-file. You can also mail a paper copy of your return to the Division of Taxation.