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Answers to Your Questions Regarding New Jersey’s New Convenience Rule
On July 21, 2023, New Jersey enacted a “convenience of the employer test” (convenience rule) with respect to nonresident income tax. The new legislation will impact out-of-state telecommuters working for New Jersey-based businesses. Continue reading for answers to your questions about the convenience rule and what actions you need to take now.
What is the convenience rule?
According to the law, a nonresident’s compensation from a New Jersey employer is sourced to the employer’s location, New Jersey, if the employee is working from an out-of-state location for their own convenience rather than for business purposes.
Can you provide an example of where the convenience rule applies?
Essentially, compensation earned by a New York resident working remotely for personal reasons for a New Jersey employer will be deemed to be receiving New Jersey-sourced income. As such, the wages will be subject to New Jersey payroll withholding rules despite the individual physically working in New York.
How is the convenience rule a departure from the previous law?
Previously, nonresident taxpayers’ wages were only subjected to a state tax if an employee of a New Jersey business physically worked in New Jersey. Now, however, that same employee will be taxed in New Jersey even when working out-of-state.
Does this affect all nonresidents working for a New Jersey employer?
Not necessarily. The new law only applies to employees who are residents of states that also impose a convenience rule (e.g., New York). For example, the new law does not apply to Pennsylvania residents who work in New Jersey since the two states have a Reciprocal Agreement that assigns payroll taxes based on an employee’s state of residence instead of worksite location.
Why did New Jersey pass this rule?
The state estimates that in recent years it provided more than $2 billion annually in tax credits for taxes paid to other states, primarily New York, for New Jersey residents who telecommuted and are subject to other states’ convenience rules. New Jersey grants these credits to keep its residents from being double-taxed. The new law aims to help New Jersey recoup some of the costs associated with issuing these credits.
When does the new law go into effect?
The legislation is retroactive to January 1, 2023.
What steps should employers and employees take now to abide by the new rule?
Taxpayers should adjust their payroll withholdings and/or make estimated tax payments for tax year 2023 as soon as possible to ensure they are fully paid in by April 15, 2024. Employers should work with their telecommuting employees to update their withholdings accordingly.
It is already August; is New Jersey granting any relief for not withholding from the beginning of the year?
Yes. The Division of Taxation has issued guidance that it will not impose interest or penalties as long as a taxpayer begins complying with the new law as of September 15, 2023.
Taxpayers in New Jersey have long contended with a convenience rule, albeit from New York. Now, New Jersey businesses will need to review their employee work locations and remote work policies in light of the new payroll tax withholding requirement. Non-compliance may result in an employer being assessed for any deficient withholding tax as well as being subject to significant interest and penalties.
For information on how to protect your business and comply with New Jersey’s convenience rule, please contact Alan Goldenberg, Principal and Leader of the State and Local Tax and Tax Controversy groups, or your Anchin Relationship Partner.