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Can I hire employees as independent contractors to save money on taxes in New Jersey? What are the requirements?

Hiring Employees as Independent Contractors in New Jersey

It is not recommended to hire employees as independent contractors to save money on taxes in New Jersey. The state has strict requirements for determining whether a worker is an employee or an independent contractor. Misclassifying employees as independent contractors can result in penalties and fines [1.2].

Requirements for Withholding Taxes

New Jersey requires employers to withhold taxes from employees. Employers are required to deduct and withhold tax from wages paid to each employee for each payroll period [1.2]. Employers are also required to report and remit gross income tax withholding for domestic employees on an annual basis [1.3].

Withholding for Unincorporated Contractors

Entities making payments to unincorporated contractors in New Jersey are required to withhold 7% of the amount paid, except as otherwise provided by law [2.1]. However, a person that obtains proof of the contractor’s registration with the Division of Revenue in the Department of the Treasury is not required to withhold [2.1].

Credits for New Employees and Investments in Urban Enterprise Zones

Under section 19 of the Urban Enterprise Zones Act, any qualified business that is actively engaged in the conduct of a business from a location within an enterprise zone, which business in that location consists primarily of manufacturing or other business that is not primarily considered as a retail sales business, or as a warehousing business, shall receive an enterprise zone employees tax credit against the amount of tax imposed under N.J.S.A. 54:10A-5 [4.1]. The credit shall only be available for new employees hired on or after the date of designation of the enterprise zone, or the date of commencement of business in the enterprise zone, whichever is later [4.1].

Conclusion

In summary, it is not recommended to hire employees as independent contractors to save money on taxes in New Jersey. Employers are required to withhold taxes from employees and report and remit gross income tax withholding for domestic employees on an annual basis. Entities making payments to unincorporated contractors in New Jersey are required to withhold 7% of the amount paid, except as otherwise provided by law. However, a person that obtains proof of the contractor’s registration with the Division of Revenue in the Department of the Treasury is not required to withhold. Under section 19 of the Urban Enterprise Zones Act, qualified businesses in enterprise zones may receive tax credits for new employees hired on or after the date of designation of the enterprise zone, or the date of commencement of business in the enterprise zone, whichever is later.

Source(s):
Jurisdiction

New Jersey