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The New Jersey House and Senate recently passed a bill (A4163/S2581) that would allow New Jersey municipalities to impose a payroll tax on businesses of up to 1% of wages. The bill now goes to Governor Phil Murphy for his signature.

Under current law, a municipal payroll tax is allowed only if it was enacted during the two-year period prior to July 1, 1995. Additionally, current law does not explicitly provide that a municipality may change the rate of an employer payroll tax so long as the rate does not exceed 1%. This bill would explicitly allow a municipality to make that change.

The bill restricts the ability to impose a payroll tax to those municipalities with a population over 200,000. Currently, only Newark and Jersey City meet this requirement; however, Newark already imposes a 1% payroll tax on businesses.

Revenues derived from the payroll tax are required to be used toward the funding of schools (including charter schools) if the municipality imposing the tax has a median household income of $55,000 or more.

Of interest, the bill provides that municipalities imposing the payroll tax may exempt from the definition of covered payroll remuneration paid to employees who are residents of the municipality. For purposes of the current Newark payroll tax, an employer with a workforce comprised of more than 50% Newark residents incurs no payroll tax for those Newark-resident employees above the 50% threshold. In order for an employer to claim and pay a reduced payroll tax obligation, Newark employers must provide the Director with a residency list that provides evidence of employees' Newark residency.

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