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12/19/2018
Jersey City, New Jersey Enacts New Employer Payroll Tax
Synopsis
On November 20, 2018, the Municipal Council of the City of Jersey City, New Jersey approved a new payroll tax on businesses operating within the city. The mayor has recently signed the law. Effective January 1, 2019, the new tax will require certain employers operating within Jersey City to pay a 1% payroll tax for services rendered within or supervised from Jersey City. The new tax is intended to raise education revenues earmarked for Jersey City schools.
Jersey City Ordinance 18-133 creates a new Article IV (2018 Payroll Tax) of Chapter 304 (Taxation) of the Municipal Code, replacing an earlier 1995 Payroll Tax, which had been declared unenforceable in 1998 as the result of litigation. Enabling legislation was passed by the New Jersey state legislature authorizing the new city tax in July 2018. Jersey City joins Newark as the only other city in the state to impose a similar tax.
Summary of the new Payroll Tax
The 2018 Payroll Tax imposes a tax equal to 1% of an employer’s payroll for services rendered where the services are either (a) performed within Jersey City or (b) performed outside Jersey City but supervised from within Jersey City. An employer is subject to the tax if they have one or more employees and payroll in excess of $2,500 in any calendar quarter.
Payroll is defined as an amount equal to the total remuneration paid by an employer to employees which is subject to federal income tax withholding by the employer for federal income tax purposes. It is generally based on the amount reportable by the employer on its federal Form 941, Employer’s Quarterly Federal Tax Return, and includes wages, bonuses, commissions, tips, property, the right to receive property, taxable benefits, and all other forms of compensation.
The tax is imposed on and borne by the employer, but this is not a withholding tax. No amount may be withheld from employees because of the new tax. Rather, an employer calculates its tax liability based upon its total eligible payroll.
Significantly, services performed by Jersey City-resident employees are excluded from the tax. This means that the new tax only applies to payroll incurred for services performed by nonresident-employees. Employers will need to provide documentation substantiating an excluded employee’s Jersey City residency. This seems, in part, to encourage local businesses to hire resident employees.
Domestic services in a private residence are also excluded from the tax. Charitable organizations are similarly exempt.
Registration & Return requirements
Businesses operating within Jersey City are required to register with the city. The 2018 Payroll Tax requires returns to be filed on a quarterly basis. If an employer’s federal Form 941 is revised or amended, the new law requires an amended return be filed with Jersey City reflecting the change within three (3) months of the revision or amendment. Further, if an employer ceases doing business or having payroll in Jersey City, an employer must notify the city within three (3) months of such date. An employer who conducts business within Jersey City on a temporary or seasonal basis is required to file a return and pay tax within 10 days of completing the temporary or seasonal business, but not less than quarterly.Audits & Appeals & Recordkeeping
Under the new law, Jersey City is empowered to conduct audits to ensure compliance with the new tax. Where a return has been filed and a deficiency is determined, the deficiency shall include taxes for up to three years to the date when the deficiency is assessed. Where no return was filed, there is no limit to the period of assessment. Significantly, employers are required to keep sufficient records for seven years.
Deficiencies will be proposed through the issuance of an Interim Notice, which may be appealed within 30 days seeking an appeal hearing. A Final Notice may be appealed to the state Tax Court under the State Tax Uniform Procedure Law.
Lawsuit challenging the new tax
Litigation challenging the new tax has already been filed, on December 11, 2018, in Hudson County Superior Court. Plaintiffs allege, in summary, that the tax violates the State and Federal Constitutions and amounts to an unlawful method of generating funds for Jersey City public schools.What does CohnReznick think?
Employers conducting business within Jersey City should take note of the new tax as well as the litigation challenging it. Local businesses hiring city-residents may likely be exempt. Larger employers with employees commuting from outside Jersey City and across the region, however, will need to understand how the tax would impact them. Employers would need to ensure they begin filing and paying the tax on a quarterly basis. Further, employers will need to track their employees’ residency status, with employees residing in neighboring Hoboken, Secaucus, or New York City, for example, triggering the tax for the employer. Taxpayers should carefully review their workforce and payroll to consider implementing a compliance strategy.Subject matter expertise
Patrick Duffany
CPA, JD, Managing Partner - Tax
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