Taxation Issues Exemptions to Construction Contractor Withholding Law

Property owners will not be responsible for withholding payroll taxes from construction subcontractors and lower tier subcontractors if the primary contractor they hire provides proof of registration with the NJ Division of Revenue, according to new guidelines issued by the NJ Division of Taxation. The guidelines are in response to a new State law that took effect on January 1. Property owners who hire an unincorporated contractor who is not registered with the Division of Revenue must withhold 7 percent of the total contract’s value and forward it to the Division of Taxation.

Earlier this month, Taxation provided the following clarification (emphasis added):

"The contractor, subcontractor or lower tier subcontractor may be excused from withholding if they have proof of registration with the Division of Revenue. Property owners also are excused from liability with respect to subcontractors if the primary contractor, with whom the owner has a contract, has provided proof of the primary contractor's registration with the Division of Revenue to the owner. With regard to liability, if the primary contractor has not provided proof of registration with the Division of Revenue, the property owner will avoid liability with respect to the primary contractor and subcontractors by withholding the 7 percent income tax on the contract price for the entire job, unless provided with proof that the subcontractors are registered with the Division of Revenue."