Jul 27 New Jersey Adopts the Convenience of the Employer Rule for Nonresident Wage Sourcing
On July 21, 2023, New Jersey Governor Phil Murphy signed legislative Bill A. 4694 into law. The new law includes a convenience of the employer rule for sourcing wages of nonresidents to New Jersey for purposes of the Gross Income Tax (aka, “individual income tax” or “GIT”). The rule will require most New Jersey-based employees who are nonresidents and are residents of New York (and several other states) to source their wages to New Jersey if the employee performed work from their residence.
The motivation for this new law stems from New York’s convenience of the employer rule, which diverts income tax revenues from New Jersey residents (who work from home in New Jersey but are based in the employer’s New York office) to New York with limited exceptions. One very narrowly construed exception to the convenience rule is when the employee’s home is a “bona fide employer office.” Unlike New York’s rule, New Jersey’s version applies only to nonresident taxpayers working from their homes in states that also use the convenience of the employer rule to source nonresident wages.
In addition to New York and New Jersey, the following states have nonresident convenience of the employer sourcing rules:
The New Jersey convenience of the employer rule will not apply to residents of Pennsylvania (and vice versa) because New Jersey and Pennsylvania have entered into a reciprocity agreement in which wages are sourced to the state of the employee’s residence regardless of whether the employee works in New Jersey or Pennsylvania.
It’s anticipated that the New Jersey Division of Taxation will announce policies clarifying the application of the convenience of the employer rule and potential exceptions. The New Jersey convenience of the employer rule is effective for tax years commencing on or after January 1, 2023.
Other notable provisions enacted under A. 4694 include:
- A provision extending the statute of limitations for amending the New Jersey resident credit for taxes paid to another state. The statute of limitations is extended to one year after the date that the taxpayer receives notification that the other state’s income tax is due (even if the regular statute of limitations on refunds has expired). This extended statute of limitations applies only if the taxpayer claimed a credit for taxes paid to another jurisdiction on the New Jersey gross income tax return for the same year to which the refund relates.
- A provision authorizing a tax credit to incentivize New Jersey residents to challenge New York (and other states’) taxes on wages earned by New Jersey residents for services performed in New Jersey between 2020 through 2023(i.e. during the Covid-19 emergency). A taxpayer who obtains a final judgment from another state resulting in a refund will receive a New Jersey gross income tax credit equal to 50% of the additional tax due to New Jersey (additional tax will be due to New Jersey as a result of the other state refund reducing the amount of the New Jersey credit for taxes paid to the other state).
- A provision granting qualified New Jersey residents a $2,000 individual income tax credit. Qualified taxpayers include employees assigned to a work location outside of New Jersey who obtain a reassignment from their employer to work at a location inside New Jersey.
- A pilot program administered by the New Jersey Economic Development Authority authorizes grants to out-of-state businesses if they assign their New Jersey resident employees to New Jersey business locations. A business is eligible for a grant under the pilot program if the business has 25 or more full-time employees and is legally domiciled in another state. Grant applications must be filed by July 1, 2028. The total grants awarded during each fiscal year are capped at $35,000,000. We anticipate that the New Jersey Economic Development Authority will provide detail concerning the computation of the amount to be awarded to qualifying businesses.
Sax’s SALT department will continue to monitor these evolving developments. To contact a member of our Tax Team, click here.