june 2007

NJ Businesses Required To Pay Withholding Tax On Payments Made To Unincorporated Contractors

BACKGROUND

Legislation effective January 1, 2007 requires all businesses and individuals maintaining an office or transacting business in the State of New Jersey, subject to certain exemptions, to withhold New Jersey Income Tax from payments made to unincorporated contractors who perform building or real property improvements. An unincorporated contractor means an individual contractor or a contractor organized as a sole proprietorship, a partnership or any other business form not taxable as a corporation for federal tax purposes.

Subject parties must withhold 7% from payments made to resident or non-resident unincorporated contractors, and must remit the sum to the State of New Jersey Division of Taxation. Failure to withhold the sum will result in liability to the State of New Jersey for the 7%, plus interest and penalties.

The following parties are exempt from the legislation:

Homeowners

Residential tenants

Governmental entities

Additionally, subject businesses and individuals which obtain proof of the unincorporated contractor’s registration with the State’s Division of Revenue, Department of Treasury are not required to withhold the 7% from payments.

WE RECOMMEND

When entering into contractual arrangements with contractors to construct, improve, alter or repair your building structure or make improvements to real property:

Ascertain the contractor’s incorporation status

If the contractor is unincorporated, obtain proof of the contractor’s New Jersey registration

If the contractor is unincorporated and has not registered with New Jersey, withhold 7% from the payments made to the contractor and remit that amount to the State of New Jersey

If you have any questions with respect to this legislation, please contact Regina E. Schneller or John H. Hague.