Effective Jan. 1, 2023, New Jersey has adopted its own 'convenience of the employer’ rule with the passing of Assembly Bill A.4694. The bill also grants a refundable income tax credit to certain New Jersey residents and creates a pilot grant program for eligible businesses.
Convenience of the Employer Rule
New Jersey has recently passed legislation which would impose its own 'convenience of the employer’ rule. Assembly Bill A.4694 was first introduced in October 2022. After passing the State Assembly and Senate in May and June 2023, respectively, Governor Phil Murphy signed the bill into law on July 21, 2023, with a retroactive effective date of Jan 1, 2023.
Previously, nonresidents were only subject to income taxation on compensation earned while physically working within the state. However, with the adoption of the bill, residents of states that impose a similar convenience of the employer rule are now subject to New Jersey state income taxation and withholding if the employee works remotely outside the state for his or her convenience rather than the necessity of New Jersey employers. As a result, New Jersey can now tax income earned by nonresident employees even though they are not physically present in the State, thereby generating additional state income tax revenues.
Under the convenience of the employer rule, compensation paid to nonresident employees for work performed outside of the state is subject to taxation in the employer's location if the employee is working remotely for his or her convenience. Currently, Delaware, Nebraska, New York, and Pennsylvania impose the convenience of the employer rule, whereas Connecticut, similar to New Jersey, only imposes the rule on nonresidents from states that have adopted the same rule. Arkansas and Massachusetts briefly had a convenience of the employer rule that was put in place during the COVID-19 pandemic. Those states repealed their convenience of the employer laws.
Refundable Tax Credit
In addition, the bill grants a refundable income tax credit to New Jersey residents who pursue legal actions against other states who impose taxes on compensation earned by residents for services performed in New Jersey and receive tax refunds from the other state as a result. The amount of the credit is 50% of the taxes owed to New Jersey because of the readjustment of the state credit for taxes paid to another state. The credit will be effective for tax years 2020 through 2023.
The Economic Development Authority will also administer a $35 million pilot program that will issue grants to businesses that re-assign New Jersey resident employees working in other states to New Jersey locations. To be eligible for the grant, businesses cannot be principally located within New Jersey and must have 25 or more full-time employees. Eligible businesses can receive grants equal to the amount of the New Jersey income tax withheld from compensation paid to resident employees who were reassigned to the state, up to maximum of $500 thousand. All grant applications must be submitted on or before July 1, 2028.
The new law will affect New Jersey businesses with employees working remotely in states with a convenience of the employer rule. In the post-pandemic economy, more employees are working remotely and many employees working for New Jersey companies may be living and working in Pennsylvania, Delaware, or New York. Businesses that allow employees to work remotely in those states should be aware of the law. Such businesses will have likely face new withholding and payroll tax requirements. Consult with your state and local tax advisor for additional information.