New Withholding Requirement for Contractor Services Effective 1/1/07   Chapter 85, P.L. 2006 requires persons, other than a governmental entity, homeowner or tenant, maintaining an office or transacting business in New Jersey and making payments for services to certain unincorporated construction contractors and unregistered individuals to withhold New Jersey Gross Income Tax at the rate of 7% from those payments. See N.J.S.A. 54A:7-1.   The Act requires every person, maintaining an office or transacting business in New Jersey, making payment of any compensation for services rendered to a resident or nonresident individual or unincorporated contractor or business to treat such individuals or entities like employees for income tax withholding purposes. Formerly, such individuals or entities would be treated as independent contractors and the estimated tax from the individuals or entities themselves was required.   Under the new law, the definition of wages for income tax withholding purposes is expanded to include any remuneration for services that is subject to the payment of taxes under the New Jersey unemployment compensation law. See N.J.S.A. 54A:7-1(a).   The purpose of Chapter 85, P.L. 2006 is to ensure that the income taxes of persons engaged in businesses are properly withheld and paid over to the State of New Jersey pending the filing of a New Jersey Gross Income Tax or Partnership Return. The Act takes effect immediately, but applies to payments made on or after January 1, 2007.   For purposes of the new law:   “Contractor” means a person entering into a contract for services to construct, improve, alter, or repair a building, structure, or improvement to real property and includes a subcontractor, but shall not include professional services as defined in section 1 of P.L.1960, c.40 (C.17:16C-1)3   “Unincorporated contractor” means an individual contractor or a contractor organized as a sole proprietorship, a partnership, or any other business form not taxable as a corporation for federal tax purposes.   A person required to deduct and withhold income tax under the new law is liable for such withholding and failure to withhold and make payment to the Division of Taxation will result in the imposition of penalties currently provided for other failures to withhold income tax from employee pay. See N.J.S.A. 54A:7-6.   Withholding on the remuneration is not required if the person making the payment has obtained from the person receiving the payment proof of the contractor’s registration with the Division of Revenue, Department of Treasury. Information concerning this procedure will be available before January 1, 2007.