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Mandatory New Jersey Income Tax Withholding for
Unincorporated Construction Contractors

New legislation will soon impose a new tax withholding burden on businesses in New Jersey. Effective January 1, 2007, companies and others conducting business in New Jersey with unincorporated construction contractors have the burden of withholding 7% New Jersey income tax from payments to unincorporated contractors unless those contractors supply proof of registration with the New Jersey Division of Revenue. Homeowners, tenants and government entities are not required to withhold the tax payments and if payments are withheld under the employee withholding statute, then there is an exemption from this withholding requirement. The Director of the Division of Taxation is to provide guidance on the types of proof that are required and how long this information needs to be maintained.

The new law includes both resident and non-resident contractors providing services to construct, improve, alter, or repair a building, structure or improvement to real property, which includes subcontractors. An owner or lessor of real property is not only responsible for the withholding tax from the payments to its contractor, but also for withholding tax payments for every subcontractor on the project. The impact of this requirement is significant because the law includes a provision that the person responsible to deduct and withhold the payments is personally liable for the tax, interest and penalties, similar to other "trust" type taxes, unless the responsible person can establish that the contractor provided proof that it was registered with the Division of Revenue.

This new law also reaches beyond the individual contractor because an unincorporated contractor includes any individual, partnership or entity that is not taxed as a corporation for federal tax purposes. With the use of LLC's and LLP's becoming more common, it will now be the burden of the owner of a construction project to investigate each contractor and subcontractor on a project to determine each type of entity for each contractor and subcontractor and for each entity that is not a corporation, to investigate what method of taxation the entity elected for federal tax purposes.

There are some additional recordkeeping requirements and returns that are required by the new law as well. Each person required to deduct and withhold tax must provide annual written statements to each unincorporated contractor, file returns on a monthly basis with the Division of Taxation and then file an annual return.

So what do you do if you have a construction project planned, or in progress? You should plan for this upcoming change by reviewing your construction contracts, preparing your staff to collect the information from the contractors and subcontractors, and start gathering the necessary information to identify which contractors and subcontractors are subject to the withholding payments.

Source: Government Affairs Committee, Burlington County Chamber of Commerce

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