On July 21, 2023, New Jersey passed a new bill, introducing the “convenience of the employer” rule. The objective of this bill is to boost tax revenue by targeting nonresidents assigned to work primarily in New Jersey who opt to work remotely outside the state for their personal convenience.[1] The law took immediate effect and is applicable for the entirety of the 2023 calendar year.[2]
Given that New Jersey has indicated its intention to adopt New York’s guidance, a summary of New York’s guidance helps explain New Jersey’s convenience of the employer test.[3] New York’s test calculates a nonresident employee’s income from New York State sources by comparing days worked within and outside the state.[4] Days worked outside the state must be obligatory rather than convenient.[5] New Jersey’s rule echoes this, evaluating factors like the necessity of a home office, business purpose, core duties, client interactions, lack of office space elsewhere, and expense reimbursement.[6]
In the context of taxation, while states usually tax residents on their overall earnings, they offer tax credits to residents for taxes paid to other states.[7] Conversely, nonresidents, are typically taxed based on income earned within a specific state.[8] As a result, the state where services are performed usually determines the taxation of an employee’s wages.[9] However, some states have a “convenience of the employer” rule which allocates wages based on an employee’s assigned work location, unless working elsewhere is a business necessity rather than a personal preference.[10] According to the convenience of the employer rules, resident states typically forego personal income tax revenues, even if a resident is employed within their state.[11] This is due to the face that the nonresident state, which follows the convenience of the employer rule, considers the wage as originating within its jurisdiction.[12]
New Jersey’s rule specifically targets employees whose home states also have such rules. This mainly affects several northeastern states, such as Connecticut, Delaware, New York, and Pennsylvania, that have similar provisions.[13] Importantly, this law won’t disrupt any existing agreements between New Jersey and other states, ensuring that agreements like the reciprocal income tax arrangement between New Jersey and Pennsylvania remain unaffected.[14]
To recover taxes that residents pay to other states with “convenience of the employer” rules, New Jersey has put forth several measures:
- Residents who are assigned to work in states with this rule can obtain a 50% credit on their New Jersey taxes after securing a final judgment from a tax court or tribunal, refunding amounts paid to the other state for services rendered in New Jersey between 2020 and 2023.[15]
- New Jersey residents with work assignments outside the state can receive a one-time credit of $2,000 upon requesting and accepting a reassignment to work within New Jersey. [16]
- Additionally, New Jersey plans to grant assistance to businesses in relocating their employees who are New Jersey residents with out-of-state assignments, back to New Jersey locations.[17]
[1] Michael K. Mahoney & Stephen Kenny, Do Good Fences Make Good Neighbors? New Jersey Enacts Nonresident Income Tax ‘Convenience of the Employer’ Law, Ogaltree Deakins (August 10, 2023), https://ogletree.com/insights/do-good-fences-make-good-neighbors-new-jersey-enacts-nonresident-income-tax-convenience-of-the-employer-law/ [hereinafter Do Good Fences].
[2] Id.
[3] David Engel, New Jersey Discusses Implementation of Convenience of Employer Rule, Thompson Reuters (August 8, 2023), https://tax.thomsonreuters.com/news/new-jersey-discusses-implementation-of-convenience-of-employer-rule/.
[4] Id.
[5] Id.
[6] Id.
[7] Do Good Fences, Supra Note 1.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
