Do Good Fences Make Good Neighbors? New Jersey Enacts Nonresident Income Tax ‘Convenience of the Employer’ Law

New Jersey enacted Assembly Bill No. 4694 on July 21, 2023, adding a “convenience of the employer” rule in an effort to gain tax revenues from nonresidents assigned to a primary work location in New Jersey who work outside the state for their own convenience. The law became effective immediately and the convenience of employer rule applies for calendar year 2023.

Quick Hits

• A4694 added a “convenience of the employer” rule in order to raise New Jersey tax revenues.
• The rule applies with respect to employees whose states of residence also have a convenience of the employer rule.
• A4694 took effect on July 21, 2023, and applies for calendar year 2023.

Though states tax residents on their global earnings, they also typically provide their residents with a tax credit for taxes that were required to be paid to another state. States generally only tax nonresidents on income sourced to their state. Thus, resident states typically lose personal income tax revenues when a resident’s income is sourced to another state.

Generally, the location where services are performed is the driving factor in sourcing an employee’s wages to a state. However, one exception to the general rule is with respect to states that have convenience of the employer rules. A convenience of the employer rule states that wages paid to an employee are sourced to the employee’s assigned work state (e.g., where the company is headquartered or maintains a brick and mortar facility) unless the work performed outside of that state is due to a business necessity, as opposed to the employee’s preference to work at home for his or her own convenience. In effect, convenience of the employer rules treat days spent working outside of the company’s office as though they were spent working at the office location unless there is a business reason for working outside the state. Under convenience of the employer rules, resident states generally lose personal income tax revenues even when a resident is working within their state because the nonresident state with the convenience of the employer rule treats the wages as sourced to its jurisdiction.

New Jersey’s convenience of the employer rule is selective. It applies only with respect to employees whose states of residence also have convenience of the employer rules. In that sense, it is targeted at several other Northeast states (Connecticut, Delaware, New York, and Pennsylvania) and one Midwest state (Nebraska) that have convenience of the employer rules. Notably, the law will not affect any other agreements between New Jersey and another state, meaning that the New Jersey and Pennsylvania reciprocal income tax agreement will continue in effect.

In an effort to recoup tax amounts residents pay to other convenience of the employer states, New Jersey will also allow:

• a 50 percent credit of the taxes owed to New Jersey after a resident assigned to work in a state with a convenience of the employer rule obtains a final judgment with a tax court or tribunal refunding the employee amounts paid to that state for services provided in New Jersey from 2020 through 2023; and
• “grants to businesses to assign their employees, who are New Jersey residents assigned to locations outside of the State, to New Jersey locations.”

Ogletree Deakins’ Morristown office and Employee Benefits and Executive Compensation Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation and New Jersey blogs as additional information becomes available.

Editor’s note: This article was revised on August 28, 2023, to reflect an amendment to the law.

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