The New Jersey Division of Taxation recently signed off on a new tax rate of 10.75% on individuals with an income over $5 million. The new rate is applied to $5,000,000 in income regardless of filing status (ex: single, married, etc). The new rate is certain to generate more tax revenue for the state. It also gives New Jersey the distinction of having the third highest top-income tax rate in the United States—slightly behind Hawaii’s 11% (for income over $200,000) and California’s 13.3% (imposed on income over $1 million).
The change goes into effect immediately and is retroactive to January 1. The new rate must be in place no later than September 1 of this year.
In a bid to collect as soon as possible, the New Jersey Division of Taxation has offered a higher rate of 15.6%. This higher rate can be used as soon as possible to account for the retroactivity of the rate and allow employees to catch up on any owed taxes.
Still with me? In simple terms, the state created a new rate of 10.75% for high income earners making $5 million a year. However, because the new rate is retroactive to last January, they created a secondary rate of 15.6% to be used for the remainder of the year so New Jersey receives its money faster and employees can avoid owing when they file their returns.
Payroll Learning Opportunity
Using this scenario as a learning moment, what does it look like when employees (highly compensated or not) want to catch up on their taxes? Oftentimes, payroll professionals will receive a call that an employee realized they weren’t withholding enough. If the year isn’t closed, there is still time to make a change.
The best place to start is by determining exactly how much extra the employee wants withheld. In the case of the recent New Jersey change, a $5 million earner needs to pay (roughly) $537,500 (or 10.75% of $5,000,000) by December 31. If the employee looks at their recent pay stub and sees they’ve only paid $200,000 year-to-date, then they have some serious catching up to do. But, that still gives them a starting point.
By taking the expected amount the employee wants to pay ($537,500) and subtracting the amount currently paid ($200,000), the employee can quickly determine how much they need to withhold ($337,500) and then break it down to the per-pay-period amount by dividing the figure by the remaining pay periods. A semi-weekly employee might have 5 months left of 10 pay periods, so it would break down to $33,750 per paycheck ($337,500/10 = $33,750).
Determining the remaining pay periods in a year are as simple as counting the remaining pay days. Make sure that if you dealing with a weekly or bi-weekly employee that you look at the actual pay date, and not the period. At the end of the year, a Friday paycheck can easily be the first check of the new year.
Once the employee has the amount they want withheld for their tax payment per pay period, most payroll systems have the ability to override the tax amount with a flat dollar amount. Some systems might only offer an additional flat dollar amount. In that case, it’s just as simple as taking the difference of the state tax being calculated and the amount the employee wants to pay.
If you find yourself updating these state tax withholding amounts, it’s best to remind the employee that they need to be cognizant of when they want it to stop. Adding a large sum to each pay period to retroactively catch up on taxes can be helpful for one year, but you likely would not want that same amount coming out on the first check of January.
Thankfully, the New Jersey Division of Taxation will not enforce any penalties or interest for insufficient withholding taxes that may otherwise be due before September 1. That assumes that the insufficiency is a result of the new tax rate, of course.
This is not the first tax update we’ve seen come out of New Jersey this year. HR and payroll professionals need to keep their eyes open, as the Garden State looks to have more changes left on the vine.
Jim Kohl is the Senior Manager of Managed Services at Namely, the HR, payroll, and benefits platform built for today's employees. Connect with Jim and the Namely team on Twitter, Facebook, and LinkedIn.
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