Some N.J. workers say they are wrongly being taxed at the millionaire rate
Earlier this fall, Gov. Phil Murphy signed into law the millionaires tax, which raises the state’s gross income tax rate on income between $1 million and $5 million from 8.97% to 10.75%. People with income over $5 million already pay that top marginal tax rate.
But a provision of the law that instructs employers to withhold state tax at a rate of 21.3% from salaries, wages and other payments, such as commissions and bonuses, from Nov. 1 through the rest of the year may be hitting people for whom the tax was not intended, according to several readers who contacted NJ Advance Media.
The state Division of Taxation website says the higher withholding rate “allows taxpayers affected by the rate increase to `catch up’ on their withholdings for the year since the new tax rate is retroactive to January 1.”
One worker, who asked not to be named, called it a cash grab by the state for a zero-percent interest loan that will eventually be refunded to non-millionaire taxpayers.
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Workers who may be getting hit include those who get a large one-time payment such as a bonus or commission check. Employers could end up withholding the 21.3% amount as if the worker earned that much every pay period and would end up with income of more than $1 million.
Workers would get the funds back when they file their tax return on April 15, 2021.
For example, let’s say a salesperson earns a $60,000 salary and gets quarterly commission checks of $100,000. In the pay period when the $100,000 check is received, the employer would withhold 21.3%. But in the end, the worker would have earned $460,000 for the year, well below the income level subject to the millionaires tax.
The Division of Taxation said that while employees can ask their employers to withhold less, they should be careful.
“It’s very important to stress that there are generally significant differences reported on an employee’s W2 between the federal and state incomes – most often because IRS rules do not tax health care premiums, some pension payments, etc.,” spokeswoman Melinda Caliendo said.
Taxpayers who are subject to the millionaires tax won’t face penalties or interest for insufficient withholding paid before Nov. 1, 2020, the Division of Taxation said.
While the Murphy administration estimates the tax will bring in $390 million from 16,491 New Jersey residents and 19,128 non-residents in the shortened fiscal year and more in future fiscal years, it’s unknown how many taxpayers are stuck paying a higher tax they ultimately won’t owe.
“The state is strapped for cash,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. “They can’t wait until April 15th to get the badly needed funds.”
He said those with 2020 taxable income of between $1 million and $5 million have under withheld their taxes for the past 40 weeks, so this inflated tax rate is a way for people to catch up on what they will eventually owe when they file their tax returns.
Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton, said he’s not surprised at the state’s strategy.
“The states as well as the federal government continue to be concerned about people not paying the right amount of taxes and would prefer to refund money that’s overwithheld rather than wait until April 15 of the following year to collect,” Hook said.
Retroactive withholding tax is frustrating to both taxpayers and tax professionals, said Gail Rosen, a Martinsville-based certified public accountant.
“It’s comparable to changing the rules in the middle of a game. How can anyone plan for that?” she said.
But, Rosen said, the good news is that you can adjust your withholding for any payroll period by providing a new Form NJ-W4 withholding certificate to your payroll department. Then you can control how much tax will be withheld.
NJ Advance Media Statehouse reporters Samantha Marcus and Brent Johnson contributed to this report.
Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com.