S corporations generally don’t make direct payments of New Jersey 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 the State.
When an S corporation registered in New Jersey 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 New Jersey 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 New Jersey taxes on New Jersey 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.” [Emphasis added]
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 made on Form CBT-2553.
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 New Jersey 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 New Jersey, or having income derived from or connected with sources within New Jersey may file a composite New Jersey 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.
Please note that this entire procedure is avoided if the shareholder consents to taxation in New Jersey of his earnings from a New Jersey-registered S corporation. The Division encourages all shareholders of an S corporation registered in New Jersey to consent to taxation in New Jersey in order to avoid additional tax filings and paperwork.
All forms are available on our website.