Taxes on Business Income in New Jersey
New Jersey imposes a corporate income tax on business income. The tax is computed based upon corporate taxable net income attributable to New Jersey. If you operate your business as a sole proprietorship or via a pass-through entity, you must report your business income on your personal income tax form.
In New Jersey, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
C Corporations Are Subject to Corporate Income Tax
Domestic corporations (corporations organized in New Jersey) and foreign corporations (corporations organized in a state other than New Jersey) are subject to a New Jersey corporation business tax. The tax is imposed only on income allocable to New Jersey, and the rate varies based on income level:
- if net income is $50,000 or less, a 6.5 percent rate is applicable.
- if net income is greater than $50,000 and no more than $100,000, the tax rate is 7.5 percent.
- if net income is greater than $100,000, it is taxed at a 9 percent rate.
In any event, the minimum tax due is:
- if gross receipts are less than $100,000, the minimum tax is $500;
- if gross receipts are $100,000 or more but less than $250,000, the minimum tax is $750;
- if gross receipts are $250,000 or more but less than $500,000, the minimum tax is $1,000;
- if gross receipts are $500,000 or more but less than $1,000,000, the minimum tax is $1,500; and
- if gross receipts are $1 million or more, the minimum tax is $2,000.
S Corporation Income Passes Through to Shareholders
If you meet the federal tax law requirements to operate as an S corporation, the federal tax code allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
New Jersey requires separate S corporation election. A corporation that is an S corporation for federal purposes, but does not elect S corporation status for New Jersey purposes, must file a return and pay tax at the tax rates imposed on C corporations as though no federal election had been made. Also, New Jersey S corporations may be required to pay the minimum corporate tax. If the entire net income of a New Jersey S corporation is not subject to federal corporate income tax, then it is not subject to the corporation business tax. However, if it has some net income that is subject to federal corporate income tax (such as built-in gains, excess passive income, and passive investment income), then it is also subject to the corporation business tax.
Partnership Income Passes Through to Partners
If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their New Jersey taxable adjusted gross income their distributive share of partnership income.
Limited Liability Taxation Is Determined by Federal Election
New Jersey law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in New Jersey are classified as either partnerships or corporations for New Jersey tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership on the federal level, then it will not be taxed on its net income. Instead, members must include in their New Jersey taxable adjusted gross income their distributive share of LLC income.
If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for New Jersey tax purposes.