New Jersey Governor Mikie Sherrill signed into law S.B. 4219, which, effective immediately, makes targeted changes to administration of the state’s local employer payroll taxes currently imposed by Newark and Jersey City.

Multistate employer payroll tax exemption

The legislation exempts from local employer payroll taxes remuneration paid to New Jersey resident employees who are already subject to an employer payroll tax in another state. This exemption is intended to address situations in which employers with multistate operations may otherwise face duplicative payroll taxation on the same wages.

As a result, wages paid to qualifying New Jersey resident employees may no longer be subject to local employer payroll taxes in Newark or Jersey City if those wages are already taxed under another state’s employer payroll tax regime. The Office of Legislative Services states that this provision will result in a reduction of New Jersey local payroll tax collections, reflecting the scope of the exemption.

Enhanced enforcement

To offset forgone revenue, the law strengthens municipal payroll tax enforcement in two ways:

1. The law requires the state to share certain New Jersey state tax return information with authorized municipalities to support their compliance efforts.
2. The law allows municipalities to retain up to 3% of employer payroll tax collections to fund payroll tax administration and enforcement. Accordingly, Jersey City may, by ordinance, retain a portion of payroll tax collections that were previously required to be transferred to Jersey City Public Schools.

Ernst & Young LLP insights

Employers should consider the following actions in response to the new legislation:

• For employers with New Jersey resident employees working in other states, review payroll records to determine whether wages qualify for the new exemption.
• Confirm proper documentation of employee residency and applicable out-of-state payroll tax coverage to support exemption claims.
• For employers operating in Newark or Jersey City, consider the possibility of increased audit and compliance activity due to enhanced data-sharing and dedicated enforcement funding.
• For multistate employers, confirm that their payroll system accurately and consistently applies the exemption.

Employers are encouraged to consult with their employment tax advisors to evaluate the impact of these law changes on payroll tax obligations and compliance strategies.