What Is NJ Withholding Tax and How Does It Work?
Learn how New Jersey's pay-as-you-go income tax system works, covering employer and employee roles in withholding.
New Jersey (NJ) withholding tax allows residents and non-residents earning income within the state to pay annual state income tax. This system operates on a “pay-as-you-go” principle, where employers deduct a portion of their employees’ wages, salaries, and other forms of compensation. The employer then remits these deducted funds directly to the New Jersey Division of Taxation on behalf of the employee. This distributes a taxpayer’s liability throughout the year, preventing a large tax bill at year-end.
Understanding NJ Withholding Tax
New Jersey withholding tax represents an advance payment toward an individual’s total state income tax liability. This tax applies primarily to wages, salaries, fees, commissions, bonuses, and other remuneration for services performed as an employee in New Jersey. It also extends to certain non-wage income, such as pensions, annuities, and specific gambling or lottery winnings.
The system involves distinct roles for both employers and employees. Employers are tasked with calculating, deducting, and remitting the appropriate tax amounts to the state. This ensures compliance and helps employees avoid underpayment penalties. For employees, withholding automatically sets aside a portion of earnings for taxes, managing their tax burden throughout the year and avoiding a substantial payment at filing.
Determining Withholding Amounts
The amount of New Jersey income tax withheld from an individual’s pay is determined by information provided by the employee. Employees complete Form NJ-W4, the Employee’s Withholding Allowance Certificate, and submit it to their employer. This form declares an employee’s withholding information.
On Form NJ-W4, employees indicate their filing status and the number of allowances they are claiming. More allowances generally result in less tax withheld, while fewer allowances lead to more tax withheld. Employees can also elect to have an additional amount deducted from each paycheck to more closely align their withholding with their expected tax liability, especially for those with multiple jobs or other income. Employers then use the information from the NJ-W4, along with state-issued withholding tables or computational methods, to calculate the precise amount to deduct from each payroll period.
Employer Responsibilities for Withholding and Remittance
Once New Jersey income tax is calculated and deducted from employee wages, employers bear the responsibility for remitting these withheld funds to the New Jersey Division of Taxation. Remittance is typically electronic, with frequencies varying based on the amount withheld. Employers with a prior-year liability of $10,000 or more for income tax withholdings are designated as “weekly payers” and must remit withheld taxes by the Wednesday following the payday.
Other employers report and remit monthly or quarterly. Form NJ-500 is used for monthly remittances of $500 or more, typically by the 15th of the following month. All employers, except certain domestic employers, must also file Form NJ-927, Employer’s Quarterly Report, by the 30th day of the month following each quarter, even if no tax was withheld. Employers must also provide employees with Form W-2, Wage and Tax Statement, by January 31st each year, summarizing annual wages and withheld New Jersey state income tax.
Employee Reporting and Reconciliation
Employees utilize the information on their annual Form W-2 to complete their individual New Jersey Gross Income Tax Return, Form NJ-1040. Form W-2 Box 16 reports state wages, and Box 17 shows withheld New Jersey state income tax. This withholding serves as a credit against the total income tax owed.
Reconciliation compares total New Jersey income tax withheld (from W-2) against the actual tax liability calculated on Form NJ-1040. If the amount withheld exceeds the actual tax liability, the employee is eligible for a refund. Conversely, if the amount withheld is less than the calculated tax liability, the employee will owe an additional payment to the state. Accurate reporting ensures proper tax compliance and adjustment of any overpayment or underpayment.