CHAPTER XXVI. PAYMENT AND INFORMATION AT THE SOURCE WITHHOLDING. What kind of income must be withheld.-The first paragraph of Section 366 which covers deductions or payments of income at the source, provides for the amount and kind of income to be withheld by withholding agent. Under paragraph 10, Section 350 of the law, occurs the definition of withholding agent, as follows: "The words withholding agent include all individuals, corporations, associations and partnerships, in whatever capacity acting, including lessees, or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the state, or of any municipal corporation or political subdivision of the state, having the control, receipt, custody, disposal or payment of interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical gains, profits and income taxable under this article." In the first paragraph of Section 366, we find explicit directions for the kind of income that is required to be deducted and withheld at the source, viz.: "Salaries, wages, commissions, gratuities, emoluments, perquisites and other fixed and determinable annual or periodical compensation of whatever kind and in whatever form paid or received, earned for personal services and taxable under this article." Rent, interest, annuities and premiums are not mentioned in this paragraph, nor is such income paid for personal services. The statutory definition of a withholding agent in paragraph 10, Section 350, is somewhat misleading since the withholding agent only deducts certain kinds of income. The kinds of income to be deducted are specifically set forth in the first paragraph of Section 366, which is headed "Information and Payment at the Source." This section is divided into five paragraphs. The first paragraph provides for the kind of income that is to be withheld or deducted at the source. The third paragraph provides for a return to be made by withholding agents for all of such income required to be deducted under the first paragraph. The second paragraph provides for the return of complete information by withholding agents, of all interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments or other fixed or determinable annual or periodical gains, profits and income except interest coupons payable to bearer, of any taxpayer taxable under this article, of $1,000 or more. The fourth and fifth paragraphs include administrative provisions for procedure similar to those in the federal act, in connection with such returns by the withholding agent or by the recipient. Since the first paragraph of Section 366 is the only paragraph in the law which specifies the income that is required to be deducted and withheld at the source, it is here stated in full: "Sec. 366. Information and payment at source. Every withholding agent shall deduct and withhold two per centum from all salaries, wages, commissions, gratuities, emoluments, perquisites and other fixed and determinable annual or periodical compensation of whatever kind and in whatever form paid or received, earned for personal services and taxable under this article, of which he shall have control, receipt, custody, disposal or payment, if the amount paid or received or to be paid or received in any taxable year on account of any individual equals or exceeds one thousand dollars, unless there shall be filed with the withholding agent, before the time when he is required to make return and payment thereof, a certificate in such form as shall be prescribed by the comptroller to the effect that the person entitled to such salary, wage, commission, gratuity, emolument, perquisite or other compensation is a resident and setting forth his residence address within the state." Note: The form of certificate is given in the Forms, following Part IV, infra.) It may be said generally that only net income paid to an employee for salary, wages or commissions for personal service shall be withheld where it exceeds $1,000, if the employee resides without the state. Rent and income from business are not mentioned in this paragraph, nor is this class of income paid in return for per sonal service. Hence, such income is not required to be deducted at the source. Taxes on profits made by a partner in a partnership doing business within the state need not be withheld, nor would it seem that any part of the payments made on account of such profits, should be withheld, whether such payments be made at a fixed period or not. Interest and annuities are not deducted because not included in the gross income of a non-resident, except to the extent to which the same shall be part of a business carried on in the state. Under paragraphs 1 and 3 of Section 366, the tax on salaries, wages and compensation paid for personal service are to be deducted by employers. No distinction is made as to the kind of employment, whether it be to a railroad president who receives $50,000 a year, or to a stenographer who receives $1,500 per year. The third paragraph of this section provides for the return of all deductions made under the first paragraph. The final sentence of paragraph 3, provides that "Every such individual corporation or partnership is hereby made liable for such tax and is hereby indemnified against the claims and demands of any individual, corporation or partnership for the amount of any payments made in accordance with the provisions of this section." Amount of tax to be deducted. The statute requires 2% to be deducted from all salaries, wages, commissions, etc., where it equals or exceeds $1,000, unless the recipient of the income is a resident and files a certificate to this effect. The tax is imposed, at a graded rate of 1, 2 and 3% on incomes respectively exceeding $1,000, $10,000, and $50,000. The original bill introduced in the legislature called for a flat rate of 2% and in the closing days of the session, the tax was fixed at a progressive rate of 1, 2 and 3%. Through an oversight, however, the withholding provision in the original bill was retained instead of a deduction of 1, 2 and 3%, to conform to the tax rate in Section 351. If the withholding agent only returns the proper amount of the tax instead of the 2% deduction provided in Section 366, it is not believed that any penalty can attach for conforming to the spirit, if not the letter of the law. On the other hand, the deduction of a larger tax than the statute evidently intended, may be an illegal exaction from non-residents in the state. In other words, if a resident of New Jersey earns a salary of $20,000, the withholding agent need not deduct $400. He only deducts $100 for the first $10,000 and $200 for the remainder-in the aggregate, $300. Note: See Comptroller's Regulations, infra. Under Section 366 the comptroller has issued the following regulations: STATE OF NEW YORK. OFFICE OF STATE COMPTROLLER, DEDUCTING AND WITHHOLDING AT SOURCE RULES AND REGULATIONS OF THE STATE COMPTROLLER, IN RELATION TO TAXES IMPOSED UPON AND WITH RESPECT TO INCOMES BY CHAPTER 627 OF THE LAWS OF 1919 Foreword The following regulations, articles 261 to 269, relative to deducting and withholding at source, are promulgated in advance of the formulation of a complete set of rules and regulations because of the immediate importance of the subject. June 11, 1919 (Signed) EUGENE M. TRAVIS, Comptroller. DEDUCTING AND WITHHOLDING AT SOURCE Art. 261. Deducting and withholding tax at source. Under the opinion of the attorney-general (Income Tax Letter No. 1, May 29, 1919), deducting and withholding is required of one per cent (1%) on the first $10,000 and of two per cent (2%) on all sums in excess of $10,000 from all salaries, wages, commissions, gratuities, emoluments, perquisites and other fixed and determinable annual or periodical compensation earned for personal services in a business, trade, profession or occupation carried on within the state, if the aggregate amount thereof in any calendar year on account of any individual equals or exceeds $1,000, unless there shall be filed with the withholding agent a certificate of residence, on Form 101, to the effect that the recipient is a resident of the state and setting forth his residence address within the state. Art. 262. Deducting and withholding in 1919. Withholding agents shall deduct and withhold, as set forth in Article 1, in respect of personal service compensation paid or credited to the payee at any time on or after January 1, 1919, except that if the employee left the service of the withholding agent prior to May 14, 1919 (the date of the enactment of chapter 627 of the laws of 1919), and was fully paid prior to that date, no duty or obligation in respect to such payments rests on the withholding agent, unless the status of employer and employee is again created during 1919 and further payments of compensation for personal services are made or credited in 1919. In other words, the provisions for deducting and withholding are effective from January 1, 1919, except as stated in this article. Art. 263. Fixed or determinable annual or periodical income. Only income earned for personal services is subject to deducting and withholding. The statute specifies that every withholding agent shall deduct from all salaries, wages, commissions, gratuities, emoluments and perquisites. But other kinds of personal service income may be included if fixed or determinable annual or periodical. Income is fixed when it is to be paid in amounts definitely predetermined. It is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. The income need not be paid annually or at an annual rate. It may be paid periodically. The word "periodical" is used in apposition to "annual" and means from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with someone's will or with the happening of an event, does not make the payments any the less determinable or periodical. The following shall be deemed to be fixed and determinable annual or periodical compensation within the meaning of section 360 of the tax law: Any payment made by way of salary, wage, commission, gratuity, emolument, perquisite or otherwise for personal services rendered, if the amount thereof shall be (a) determined prior to, concurrent with or subsequent to the rendering of the service, and is (b) based on personal services rendered by the hour, week, month, year or other period of time, whether such personal service consists of (c) the performance of specified or unspecified duties, or of |