Division of TaxationS corporations generally do not make direct payments of Ó£»¨ÊÓƵ Gross Income Taxes. Instead, the corporation's earnings or losses are divided among and passed through to the corporation's shareholders. Shareholders are responsible for paying any tax owed. All initial shareholders must agree to pay taxes to New Jersey in this manner when they form an S corporation and register it in Ó£»¨ÊÓƵ.
When an S corporation registered in Ó£»¨ÊÓƵ alters or expands its ownership, new shareholders also are responsible for reporting taxable gains and losses. However, some new shareholders may not consent to file a Ó£»¨ÊÓƵ Income Tax return.
Under N.J.S.A. 54:10A-5.22(b)(3): “If shareholders that are not initial shareholders fail to consent to pay Ó£»¨ÊÓƵ taxes on Ó£»¨ÊÓƵ S corporation results, the State shall “have the right and jurisdiction to collect a payment … directly from the corporation …. In such case, the corporation shall have the right but not the obligation to recover payments made by the corporation … from each non-consenting shareholder.”
In addition, under N.J.A.C. 18:7-20.1(c)(1)(iii): “With respect to non-consenting shareholders, the corporation and consenting shareholders consent to the corporation assuming any tax liabilities of the non-consenting shareholder as may be required pursuant to N.J.S.A. 54:10A-5.22b.” An existing shareholder whose percentage of stock ownership changes is not considered a new shareholder. The election to consent to taxation is done .
Calculating and Remitting the Tax
Complete Schedule K when filing the CBT-100S return to calculate the tax, which becomes part of the corporation's total balance due. In addition, complete Form NJ-1040-SC for each non-consenting shareholder when filing and give the non-consenting shareholder their copy.
Limited Exemption
There is a limited exemption to the procedures set forth above when a non-consenting, nonresident shareholder elects to participate in a composite return under N.J.A.C. 18:35-5.2 which states, in part, that: "(a) A general partnership, a limited partnership, a limited liability partnership (LLP), a limited liability company (LLC), a Ó£»¨ÊÓƵ electing S corporation, an estate, a trust, or a professional athletic team (as defined in N.J.A.C. 18:35-5.1) doing business or conducting activities in Ó£»¨ÊÓƵ, or having income derived from or connected with sources within New Jersey may file a composite Ó£»¨ÊÓƵ Nonresident Gross Income Tax return (Form NJ-1080-C) on behalf of its qualified nonresident individual partners, members, shareholders, or beneficiaries, as the case may be, who elect to file such return. . . ."
Tax payments made by an S corporation on behalf of its non-consenting shareholders on Form NJ-1080-C will satisfy the corporation's requirement to make tax payments under N.J.S.A. 54:10A-5.22(b)(3) for the participating shareholders. The filing of Form NJ-1080-C by an S corporation does not relieve the corporation from making payments on behalf of non-consenting shareholders that do not elect or qualify to participate on Form NJ-1080-C.
However, this entire procedure is avoided if the shareholder consents to taxation in New Jersey of their earnings from a Ó£»¨ÊÓƵ-registered S corporation. We encourage all shareholders of an S corporation registered in Ó£»¨ÊÓƵ to consent to taxation in Ó£»¨ÊÓƵ in order to avoid additional tax filings and paperwork.