WHAT THE …?

This information release was just sent to me via email from the National Society of Tax Professionals. I immediately went to the NJ Division of Taxation website – it was not included in the What’s New? Page.

I see that homeowners (I assume a homeowner includes the owner of residential rental property) and tenants are exempt from this new requirement – but it will apply to a NJ business who pays a contractor to repair or improve business property.

The worst part of this is the requirement, toward the end of the notice, that NJ businesses that contract for repairs or improvements are also responsible to make sure that the contractors and sub-contractors withhold from their individual sub-contractors. What a mess!

“New Withholding Requirement for Construction Contractor Services Effective January 1, 2007:

Chapter 85, P.L. 2006 requires persons, other than a governmental entity, homeowner or tenant, maintaining an office or transacting business in New Jersey and making payments for services to certain unregistered, unincorporated construction contractors to withhold New Jersey Gross Income Tax at the rate of 7% from those payments. See N.J.S.A. 54A:7-1.

The purpose of Chapter 85, P.L. 2006 is to ensure that the income taxes of persons engaged in businesses are properly withheld and paid over to the State of New Jersey pending the filing of a New Jersey Gross Income Tax or Partnership Return. The Act takes effect immediately, but applies to payments made on or after January 1, 2007.

For purposes of the new law:"Contractor" means a person entering into a contract for services to construct, improve, alter, or repair a building, structure, or improvement to real property and includes a subcontractor, but shall not include professional services as defined in section 1 of P.L.1960, c.40 (C.17:16C-1)."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.

Withholding on the remuneration is not required if the person making the payment has obtained from the person receiving the payment proof of the construction contractor’s registration with the Division of Revenue, Department of Treasury. A Business Registration Certificate serves as proof of a valid business registration with the Division of Revenue. Unincorporated Construction Contractors with no business tax or employer obligations may register with the Division of Revenue using Form REG-A instead of Form NJ-REG in order to obtain the Business Registration Certificate. Proof of the construction contractor’s registration with the Division of Revenue should be retained by the person making the payment.

The owner of real property to which construction or repair is being made that is required to deduct and withhold tax under the new law is also made liable for that contractor's withholding from a subcontractor, or the subcontractor's withholding from a lower tier subcontractor on that contract. Failure to withhold and make payment to the Division of Taxation will result in the imposition of penalties currently provided for other failures to withhold income tax from employee pay. See N.J.S.A. 54A:7-6.The contractor, subcontractor or lower tier subcontractor may be excused from that withholding if they have proof of registration with the Division of Revenue.

Please continue to check this page. Additional information will be added as it becomes available.

For more information regarding income tax withholding, please contact the Customer Service Center in the Division of Taxation at (609) 292-6400. If you have questions regarding services subject to the New Jersey Unemployment Compensation Law, N.J.S.A 43:21-1 et seq., you may contact the Division of Employer Accounts in the New Jersey Department of Labor and Workforce Development at (609) 777-4315.”

Oi vey!