New Jersey’s non-resident “convenience of the employer rule” may require action by September 15
New law establishes a “convenience of the employer rule” in NJ retroactive to January 1, 2023
On July 21, 2023, New Jersey Governor Phil Murphy signed a NJ tax law which, retroactive to January 1, 2023, establishes a “convenience of the employer rule” that subjects New Jersey nonresidents assigned to work primarily for a NJ employer to New Jersey state income tax and withholding. Note: This law only applies to New Jersey nonresidents who are residents of states that also have a convenience of the employer rule.
Prior to the enactment of this law, the wages of nonresidents were subject to New Jersey income tax only on wages earned while physically present in New Jersey.
What is a “convenience of the employer rule”?
In most states, the general rule is that employees who are residents of one state (State A) but work for an employer in another state (State B), are taxed by State B only on wages earned for days the employee is physically present in State B. However, if State B has a "convenience of the employer rule," a State A resident working within State A for an employer in State B is subject to State B nonresident income tax for all wages earned in State A and State B. Also, if states have “reciprocal agreements,” such as the reciprocal agreement between Pennsylvania and New Jersey, the states agree to only assess and withhold state income tax in the employee’s state of residence.
Generally, state convenience of the employer rules resulted from remote work during the COVID-19 pandemic. Although New Jersey's new law applies to residents of any state that imposes the convenience of the employer rule, it will have the greatest impact on New York and Connecticut residents working remotely for a New Jersey employer.
Even before the COVID-19 pandemic, New York State had a "convenience of the employer rule" for nonresident employees assigned to work primarily for a New York employer if work was performed in the resident state for the employee's own convenience and not the necessity of the employer.
Then, beginning in tax year 2019, Connecticut instituted a convenience of the employer rule sourcing income to Connecticut where nonresidents, assigned to work in Connecticut, work outside of the state for their own convenience and not the necessity of the employer. Like the New Jersey law, Connecticut's convenience of the employer rule applies only if the employee's resident state also has a convenience of the employer rule.
Currently, in addition to New Jersey, Connecticut, Delaware, Nebraska, and New York have the convenience of the employer statutes. In addition, convenience of employer rules have been applied administratively in Alabama in 2020, and in Arkansas until it was repealed in 2021.
The Connecticut and New Jersey statutes are the only ones in which the rule is limited to a nonresident whose resident state also imposes a convenience of the employer rule.
Recent NJ guidance regarding administration of the convenience of the employer rule – action may be required by September 15, 2023
On August 11, 2023, the NJ Division of Taxation provided additional guidance regarding the administration of the recently enacted “convenience of the employer rule.”
A summary of the guidance from the Division of Taxation:
- The convenience of the employer rule will apply only to residents of Alabama, Delaware, Nebraska, and New York (triggering states).
- NOTE: Pennsylvania is not included due to the reciprocal agreement referred to above
- Employers should apply the rules of the resident state in determining when the convenience of the employer rule applies. For example, a New York resident who performs services for a New Jersey employer from their New York home for their own convenience is subject to New York's test in determining if the convenience of the employer rule will apply to them.
- Division of Taxation requires employers to begin withholding (or individuals to begin making estimated tax payments) as soon as possible so the correct amount of New Jersey income tax will be paid by April 15, 2024.
- In addition, the Division of Taxation suggests that employers should consider adjusting withholding as soon as possible as an accommodation to employees so that they are not underpaid.
- Finally, the Division of Taxation will not impose penalty and interest, if the taxpayer begins complying with the new law as of September 15, 2023.
Possible action if you are subject to this new NJ tax lawTo comply with this new law, if applicable, employers should:
- Identity New Jersey nonresidents working from home for a New Jersey office
- Determine if the New Jersey nonresidents are residents of a triggering state
- Determine the 2023 withholding adjustment if New Jersey's convenience of the employer rule applies
- Communicate to affected employees the additional withholding required and why
- Deduct the withholding adjustment from future 2023 wages or make other arrangements for payment of the added New Jersey state income tax
Since this law was just enacted in July 2023, and other states may enact similar laws, additional updates and guidance are likely. We will continue to monitor this subject and will provide updated information as soon as it becomes available.
Please contact your Herbein tax consultant if you have questions regarding the content of this article.
Article Contributed by Barry D. Groebel