Convenience of the employer sourcing rule enacted for New Jersey gross income tax

On July 21, 2023, New Jersey enacted legislation providing for a “convenience of the employer” rule. Multiple states (including New York) have historically imposed a “convenience of the employer” rule which requires that employees’ wages be sourced to their state if the employee works remotely for their own convenience rather than the convenience of the employer in another state.

For example, New York’s position regarding this rule has been to require withholding for nonresidents who are associated with a New York-headquartered company or primary office but work remotely, outside of New York, and to consider those days worked outside New York as days worked in New York unless the employer has established a “bona fide” office outside of New York.

The convenience of the employer rule has been a source of controversy, particularly during and after the pandemic, which led to many more employees working remotely.

Late last year, New Jersey’s Governor proposed that New Jersey impose a similar rule to counteract the rules imposed by surrounding states.    

The New Jersey legislation imposes a reciprocal tax, beginning in 2023, on nonresidents working remotely outside of New Jersey (for their convenience) for in-state New Jersey employers if they live in a state that imposes convenience of employer rules on New Jersey residents.

If an employee’s state of residence similarly imposes a “convenience of the employer” rule, and the employee works for a New Jersey employer from a location in the employee’s state of residence for the employee’s own convenience, then the New Jersey employer would be required to include those days as days worked in New Jersey and withhold income tax.

The Division of Taxation has indicated that the new law applies only to employees who are residents of Arkansas, Delaware, Nebraska, and New York. The new law does not apply to Pennsylvania residents who work in New Jersey, since there is a Reciprocal Agreement in place with that state.

Similarly, Connecticut residents who work in New Jersey are exempt, based on New Jersey's understanding that the Connecticut convenience rule does not apply to New Jersey residents who work in Connecticut.

The Division intends to coordinate with the Connecticut Department of Revenue Services and issue further guidance for clarification.

Refundable gross income tax credit to be provided

The legislation also provides a refundable gross income tax credit (for tax years 2020 through 2023) for New Jersey residents who obtain a final judgement from a state tax court or tribunal in the resident taxpayer’s favor which results in the resident taxpayer being refunded tax paid to that state or jurisdiction based on the fact that the income was from services performed while the resident taxpayer was within New Jersey.

The credit is equal to 50% of the amount of tax owed to New Jersey resulting from the revision of New Jersey’s credit for tax paid to another state.

Pilot program will offer grants to businesses relocating employees to be assigned to New Jersey

The legislation also created a $35 million pilot program (to be administered by the New Jersey Economic Development Authority) which will provide grants to promote businesses that have New Jersey resident employees who are assigned to work locations outside New Jersey to assign these employees to locations within New Jersey.

A business will be eligible for a grant under the program if it has more than 25 full-time employees and is primarily located in another state. The amount of the grant will be the lesser of New Jersey gross income withholding taxes of resident employees who are reassigned by the business to a location in New Jersey or $500,000.

In order to secure a grant, businesses must submit an application to the New Jersey Economic Development Authority by July 1, 2028. For purposes of awarding the grants, New Jersey may give priority to businesses that acquire or lease office space in New Jersey as well as make a capital investment in the office space, and/or submit a plan indicating the business will provide bonuses or increase the compensation of the employees that relocate to New Jersey.

Mazars’ insight

It’s important to note (as indicated above) that New Jersey’s “convenience of the employer” rule only applies in the case of another state also implementing a similar rule. This can be seen as New Jersey striking back at New York’s longstanding “convenience of the employer” rule.

Since the law also creates a refundable gross income tax credit for New Jersey residents who receive a refund of taxes paid to another state on the grounds that the income was derived from services performed by the resident taxpayer while within New Jersey, this could provide an incentive to New Jersey residents to challenge New York’s stance on the “convenience rule” during the COVID-19 pandemic. The credit equals 50% of the amount of taxes owed to New Jersey as a result of the readjustment for tax years 2020 through 2023.

Please contact your Mazars professional for additional information.

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.

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