How to calculate New Jersey payroll for small business?

For small business owners in New Jersey, managing payroll can feel like a complex puzzle. This guide is designed to simplify the process, helping you understand exactly how to calculate payroll for your employees, ensure compliance, and avoid costly mistakes.

This content is for any new or existing small business owner in New Jersey who wants to manage their payroll accurately. It solves the problem of figuring out what taxes to withhold, how much to pay, and where to file.

The Essential Steps to Calculate New Jersey Payroll

Before you can even start, you need to be set up as an employer in New Jersey. This involves getting a Federal Employer Identification Number (FEIN) from the IRS and registering your business with the state to get a New Jersey Employer Identification Number.

Step 1: Calculate Gross Pay

Gross pay is the total amount an employee earns before any deductions.

• For hourly employees: Multiply the total hours worked by their hourly rate. Remember to calculate overtime (1.5x the normal rate) for all hours worked over 40 in a single workweek.
• For salaried employees: Divide their annual salary by the number of pay periods. For a bi-weekly pay schedule, you would divide the annual salary by 26.

Example: Sarah is a salaried employee with an annual salary of $65,000. Her gross pay per bi-weekly pay period is $65,000 / 26 = $2,500.

Step 2: Withhold Federal Payroll Taxes

From the gross pay, you must subtract federal taxes.

• Federal Income Tax (FIT): The amount is based on the employee’s Form W-4 and the IRS tax tables.
• FICA Taxes (Social Security and Medicare):
  • Social Security: Withhold 6.2% of the employee’s wages. As the employer, you must pay a matching 6.2%.
  • Medicare: Withhold 1.45% of the employee’s wages. You also pay a matching 1.45%.

Step 3: Withhold New Jersey State Payroll Taxes

This is where state-specific calculations come in. New Jersey has several key taxes you must account for.

• New Jersey State Income Tax (NJ-SIT): You must withhold this based on the employee’s Form NJ-W4 and the state’s tax tables.
• Unemployment Insurance (UI) and Workforce Development/TDI/Family Leave (WFD/TDI/FLI): New Jersey’s system is a combined contribution. The employer’s rate for UI/WFD is based on your “experience rating,” which is tied to unemployment claims. Employees contribute to UI, TDI, and FLI. These rates are updated annually.

Example: Let’s continue with Sarah, who earns $2,500 gross pay bi-weekly.

• Federal Taxes:
  • Social Security: $2,500 * 6.2% = $155.00
  • Medicare: $2,500 * 1.45% = $36.25
  • (Federal Income Tax would be calculated using her W-4 and IRS tables)
• New Jersey Taxes:
  • (NJ Income Tax would be calculated using her NJ-W4 and state tables)
  • Employee Contribution: Based on the current year’s rates for UI, TDI, and FLI, let’s say the combined rate is 0.42%.
    • $2,500 * 0.42% = $10.50

Step 4: Account for Other Deductions

After taxes, you might have other deductions to subtract. These could be pre-tax (like 401k contributions or health insurance premiums) or post-tax (like Roth IRA contributions or wage garnishments).

Step 5: Calculate Net Pay

Net pay is the final amount an employee takes home.

Gross Pay – All Taxes (Federal & State) – All Deductions = Net Pay

Continuing our example, once you subtract all taxes and any other deductions from Sarah’s $2,500 gross pay, you get her final net pay.

To simplify this complex process and ensure you are always compliant with the latest New Jersey tax rates, many businesses rely on payroll software like QuickBooks Payroll or services like ADP and Paychex. These platforms automate calculations, payments, and tax filings, significantly reducing your administrative burden.

Frequently Asked Questions (FAQ)

Q: How do I get an EIN for my New Jersey small business?

A: You can apply for a free Federal Employer Identification Number (FEIN) directly on the IRS website. It’s a quick process, and you’ll receive your number immediately after completing the online form.

Q: What is the minimum wage in New Jersey?

A: The New Jersey minimum wage is subject to change. It’s crucial to regularly check the state’s Department of Labor and Workforce Development website for the current minimum wage to ensure you’re paying your employees correctly.

Q: Can I do payroll myself without a service?

A: Yes, you can. However, it requires a deep understanding of both federal and New Jersey tax laws and a commitment to staying updated on rate changes. For many small businesses, using a payroll service or software is a worthwhile investment to save time and prevent errors.

Q: What is the difference between an employee and an independent contractor?

A: An employee has their work controlled by the employer, who also provides tools and sets schedules. An independent contractor generally controls their own work and uses their own tools. This distinction is critical as you don’t withhold payroll taxes for contractors.

Q: What are New Jersey’s payroll tax rates for employers?

A: Employer payroll tax rates in New Jersey vary based on the business’s unique experience rating. New businesses typically receive a standard rate for the first few years. You will be notified of your specific rates by the state.

Q: What are the penalties for late payroll tax payments in New Jersey?

A: New Jersey imposes penalties and interest on late or unpaid payroll taxes. The penalties can be substantial, making it essential to file and pay your taxes on time.

Q: What forms do I need for New Jersey payroll?

A: Key forms include the Federal Form W-4, New Jersey Form NJ-W4, and quarterly filing forms like the NJ-927. All payroll records must be maintained for several years.