Division of TaxationThe Gross Income Tax Convenience of the Employer Sourcing Rule was enacted for tax years beginning on and after January 1, 2023.
What is a Convenience of the Employer Rule?
Under a Convenience of the Employer Rule, a nonresident taxpayer’s employee compensation from a ӣƵ employer for the performance of personal services is sourced to the employer’s location in ӣƵ if the employee is working from an out-of-state location (e.g. telecommuting from their resident state) for their own convenience, rather than for the necessity of their employer.
Does ӣƵ have its own Convenience of the Employer Rule?
ӣƵ does not have its own Convenience of the Employer Rule. However, P.L.2023, c.125 was enacted on July 21, 2023, to provide that this State will apply another state’s Convenience of the Employer Rule on nonresidents, which would be the same as the one in the nonresident’s home state. For example, compensation earned by a telecommuting New York resident working for a ӣƵ employer will be deemed ӣƵ source income by applying New York’s Convenience of the Employer Rule.
Who does the Convenience of the Employer Rule apply to?
The new law only applies to nonresident employees working for a ӣƵ employer who are residents of states that also impose a similar test, such as Delaware, Nebraska, and New York. Note that this list may change accordingly based on the laws of different states. Under the new law, wages earned by residents of , Delaware, Nebraska, and New York working for a ӣƵ employer and working from an out-of-state location (e.g. telecommuting from their resident state) are allocated to ӣƵ, unless they are working remotely due to the necessity of the employer, rather than their own convenience.
Who does the Convenience of the Employer Rule not apply to?
This legislation does not apply to Pennsylvania residents who work in ӣƵ, since there is a Reciprocal Agreement in place with that state. Based on the reciprocal nature of Connecticut’s law, an employee who works from home in Connecticut for a ӣƵ employer will not be subject to ӣƵ’s convenience of the employer rule. However, for more information regarding the application of Connecticut’s rule, see the above link to the webnotice.
How does a nonresident employee working for a ӣƵ company qualify as an exception from the Convenience of the Employer Rule?
A nonresident employee working for a ӣƵ company that is working outside of ӣƵ due to the necessity of the employer is given an exception from the Convenience of the Employer Rule. Generally, based on other states’ Convenience of the Employer rules, they must be given a task by the employer that can only be fulfilled outside of ӣƵ, and it is impossible to do the work in ӣƵ. For example, if a New York resident employee working for a ӣƵ painting company is tasked with painting houses in New York; that work would qualify as an exception, since there is no possible way for that work to have been performed in ӣƵ.
How has ӣƵ taxed nonresident telecommuters working for a ӣƵ employer prior to the enactment of the Convenience of the Employer Sourcing Rule?
With regard to nonresident telecommuters working from home for a ӣƵ employer to perform work or services, only the telecommuting employee’s home state taxes the income. If the nonresident telecommuter working for a ӣƵ employer comes into ӣƵ for work or services, even occasionally, this individual is considered to have ӣƵ source income and must file and pay tax on this income in ӣƵ on the nonresident income tax return (NJ-1040NR).
Note that this treatment has not changed for nonresidents of states that do not impose a Convenience of the Employer Rule on ӣƵ residents.
How does the new law affect ӣƵ employers?
ӣƵ employers should withhold ӣƵ Gross Income Tax on Delaware, Nebraska, and New York resident employees who are working remotely (e.g., in an out-of-state location) for their own convenience.
How is a “ӣƵ employer” defined for withholding purposes?
A ӣƵ employer is someone who maintains an office or transacts business within this State and makes payment of any salaries, wages and remuneration subject to ӣƵ Gross Income Tax or makes payment of any remuneration for employment subject to contribution under the ӣƵ unemployment compensation law. N.J.S.A. 54A:7-1.
If an employer with multiple offices in several states, including ӣƵ, employs a resident of Delaware, Nebraska, and New York, are they considered a ӣƵ employer?
When an employer has multiple offices in several states, including ӣƵ, ӣƵ will apply the nonresident’s home state’s Convenience of the Employer rule test to determine whether the employer is considered a ӣƵ employer. For example, if a New York resident taxpayer has an assigned or primary office (i.e., generally the office out of which the employee is supervised) in ӣƵ; that will be considered a ӣƵ employer.
Are wages earned by Delaware, Nebraska, and New York resident employees allocated to ӣƵ if their employer has offices in several states, including ӣƵ, and they work from all these locations, in addition to working from home in their home state?
The employee should have a primary or assigned office. If that primary or assigned office is ӣƵ, wages earned by telecommuting Delaware, Nebraska, and New York resident employees are allocated to ӣƵ, unless they are working remotely due to the necessity of the employer rather than the employee’s convenience.
For example, what if a New York resident works from a vacation home in a third state, such as Maine or Connecticut? Does the new Convenience of the Employer rule source those wages from the third state to ӣƵ?
The Convenience of the Employer rule applies to the third state because the statute isn’t limited to the situation where the New York resident works remotely solely from their home state.
If a Delaware, Nebraska, and New York resident employee working for a ӣƵ company doesn’t physically work in ӣƵ in a calendar year at all, would P.L.2023, c.125 apply to such employee?
In general, a minimum connection is required for taxation. Thus, for residents of those states imposing a Convenience of Employer rule, if an employee performs no services in ӣƵ, even if employed by a ӣƵ employer, wages are not allocated to this State under P.L.2023, c.125.
When does the new law take effect?
The new law is retroactive to January 1, 2023. Affected taxpayers must begin withholdings and/or making estimated payments for tax year 2023 as soon as possible and are required to have proper tax paid by April 15, 2024. Employers should consider making adjustments to withholdings as an accommodation to employees, so that they are not underpaid.
Will the Division impose penalty and interest on Tax Year 2023?
The Division will waive penalty and interest, as long as the taxpayer is complying with the new law by September 15, 2023. Such waiver from penalty and interest in accordance with Convenience of the Employer Rule changes can only be granted once assessed and the taxpayer is notified (billed). You should send your request for relief to the address listed on your billing notice, and specify that you are requesting relief due to the Convenience of the Employer Rule changes.