New Jersey has enacted legislation (S4219), effective immediately, aimed at strengthening enforcement of municipal employer payroll taxes. The law primarily affects employers operating in municipalities that impose local payroll taxes, including Newark and Jersey City, by enhancing coordination between state and local tax authorities. Martin D. Hauptman, Esq., Partner in our Tax, Trusts, and Estates Practice Groups, outlines what employers need to know.
What Changed
Under the new law, the New Jersey Division of Taxation is now required to share employer tax data with municipalities upon request. This mandatory information exchange enables local tax authorities to compare state-level payroll filings with municipal payroll tax reports. As a result, municipalities will have greater ability to verify reported payroll figures and identify businesses that may be subject to local payroll taxes but have not filed or paid accordingly.
The legislation also increases the percentage of collected payroll taxes that municipalities may retain for administrative costs, raising the allowable retention from 1% to 3%.
Who Is Impacted
Employers operating in municipalities that impose local payroll taxes—most notably Newark and Jersey City—are directly affected. Businesses with employees working within these jurisdictions should expect increased scrutiny as municipalities gain access to state tax data for cross-referencing purposes.
Employers with multistate operations should also take note of a clarifying provision in the law: an employer is not required to pay a New Jersey municipal payroll tax for an employee who is already subject to an out-of-state payroll tax for services performed outside of New Jersey.
Key Tax Considerations
The expanded data-sharing authority significantly enhances enforcement capabilities at the municipal level. Employers should ensure that payroll allocations, sourcing determinations, and municipal filings are accurate and consistent with state filings. Discrepancies between state and local reporting may now be more readily identified.
Businesses should also review their internal payroll systems to confirm proper tracking of employee work locations, particularly in hybrid or remote work environments. Clear documentation supporting sourcing decisions will be critical in the event of a municipal inquiry or audit.
Moving Forward
With enhanced cooperation between the Division of Taxation and local governments, municipalities now have a powerful compliance tool. Employers should anticipate increased enforcement activity and proactively review their municipal payroll tax compliance posture
Next Steps
Businesses operating in Newark, Jersey City, or other municipalities with local payroll taxes should conduct a compliance review to ensure payroll tax filings accurately reflect employee work locations and wage allocations. Addressing potential discrepancies now may reduce the risk of assessment, penalties, or interest later.
For guidance on how this legislation may impact your business or to review your municipal payroll tax compliance, contact Martin D. Hauptman at mhauptman@mblawfirm.com or 973-243-7912.