Like most states, New Jersey requires employers to withhold state income tax from employees' paychecks. The employer follows the New Jersey Department of Treasury, Division of Taxation's withholding requirements. Similar to federal income tax withholding, New Jersey permits employees who live and work in the state to claim withholding allowances, which lowers taxable income.
A New Jersey employer is supposed to give employees a NJ-W4 form or Employee's Withholding Allowance Certificate to complete, which helps him to determine the amount of state income tax to withhold from each employee's paychecks. The employee puts the amount of allowances that she's claiming on Line 4 of the form. An employer can use the employee's federal W-4 form for state income tax purposes if the employee does not submit a NJ-W4. Specifically, the employer can use the same allowances that the employee claims on Line 5 of her W-4 for both federal and state income tax purposes.
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The allowances an employee claims on his NJ-W4 or W-4 are worth a certain amount, which the employer subtracts from the employee's wages for the pay period to determine taxable wages. The employer uses Publication NJ-WT, the New Jersey Gross Income Tax Instruction Booklet, to determine the value of each allowance. As of publication, New Jersey gives $2.70 per allowance for a daily pay period, which equals $19.20 weekly, $38.40 biweekly, $41.60 semimonthly, $83.30 monthly, $250 quarterly, $500 semiannually and $1,000 annually -- see page 4 of Publication NJ-WT. For example, an employee who gets paid weekly and has three allowances receives a total allowance value of $57.60. The employer subtracts this amount from the employee's weekly wages and uses the percentage method table that matches the employee's pay period and wages after allowances to figure out state income tax.
New Jersey has a reciprocal tax agreement with Pennsylvania, which means that employees who live in Pennsylvania and work in New Jersey are exempt from New Jersey income tax. In this case, the employee is supposed to complete a Form NJ-165, Employee's Certificate of Non-residence in New Jersey, and submit it to her employer. The employer withholds Pennsylvania income tax for employees subject to the reciprocal tax agreement according to the Pennsylvania Department of Revenue's guidelines.
Federal Allowance Value
New Jersey employees are subject to federal income tax withholding. An employer can find the amount that the IRS gives for withholding allowances in the agency's Circular E for the respective tax year. As of publication, the IRS gives $14.23 per allowance for a daily pay period, which equals $71.15 weekly, $142.31 biweekly, $154.17 semimonthly, $308.33 monthly, $925 quarterly, $1,850 semiannually and $3,700 annually -- see page 35 of the 2011 Circular E.