On July 21, 2023, New Jersey enacted P.L.2023 c.125 (NJ A4694) creating a “convenience of the employer rule” that applies to individual taxpayers who are nonresidents of New Jersey and who are paid for services performed outside the state by a New Jersey employer but were not required to do so by the employer. Such an employer must withhold New Jersey income tax as though the employee worked in New Jersey. This rule applies only to employees whose state of residence imposes a convenience rule, such as Connecticut, Delaware, Nebraska, New York, and Pennsylvania, or any state that enacts such legislation in the future. The new law does not apply to Pennsylvania residents who work in New Jersey, however, because there is a reciprocal agreement in place between the states.

New Jersey’s new law is retroactive to January 1, 2023. Affected taxpayers must begin withholdings and making estimated payments for the 2023 tax year as soon as possible, The proper amount of tax must be paid by April 15, 2024. The New Jersey Division of Taxation will not impose penalty and interest, as long as the taxpayer begins complying with the new law as of September 15, 2023.

The New Jersey convenience rule states the following:

An individual who is a nonresident of New Jersey and who has income from employee compensation from a New Jersey employer for the performance of personal services performed outside of New Jersey that were not required by the employer to be performed outside of New Jersey, and whose state of residence imposes an income or wage tax that requires employee compensation to be sourced to an employer’s location if the nonresident renders the personal services from an out-of-state location for the convenience of the nonresident employee and not due to the necessity of the employer, New Jersey shall impose a similar New Jersey sourcing rule on that income of the nonresident.

The division has advised that it intends to mirror the rules of the other state that imposes a convenience rule on New Jersey residents. Therefore, the division will apply New York’s convenience of the employer rule test against New York residents.

In addition, effective for taxable years beginning on or after January 1, 2020, but before January 1, 2024, the law allows New Jersey resident taxpayers who are subject to a convenience rule in other states to claim a resident credit against their New Jersey gross income tax liability. Although this may appear to be a simple procedure, the provisions in the law governing the steps required for a taxpayer to avail themselves of this provision are far from simple. Taxpayers must do the following:

  • ▪ Pay any income tax or wage tax imposed for the taxable year by another state of the United States, or political subdivision of such state, or by the District of Columbia;
  • ▪ Apply for and [be] denied a refund from such state or jurisdiction for taxes paid to that state or jurisdiction on income derived from services rendered while the resident taxpayer was within New Jersey;
  • ▪ File an appeal with a tax court or tribunal through which the resident taxpayer formally protests the denial by another state or jurisdiction of the refund requested by the resident taxpayer for taxes paid on income derived from services rendered while the resident taxpayer was within New Jersey;
  • ▪ Obtain a final judgment from the tax court or tribunal resulting in the resident taxpayer being refunded taxes paid to another state or jurisdiction on income dderived from services rendered while the resident taxpayer was within New Jersey. [The taxpayer] shall be allowed a credit against the tax otherwise due for the taxable year under the New Jersey Gross Income Tax Act in an amount equal to 50% of the amount of taxes that are owed to New Jersey as a result of the readjustment of the resident credit; and
  • ▪ File a claim for readjustment of the resident credit within:
    • 3 years from the time the return was filed,
    • 2 years from the time the tax was paid, or
    • 1 year after the date the taxpayer received notification that the other state’s income tax was due.

     

The division shall not allow a credit or refund unless the taxpayer files a claim within such period, whichever of the above periods expires later.

The steps required to readjust the New Jersey resident credit—which will only result in 50% of the tax paid to a nonresident state under that state’s convenience rule—can be cost-prohibitive, in many cases exceeding the amount of the credit. Tax preparers should familiarize themselves with the provisions of the law in order to advise affected taxpayers whether claiming the resident credit will be worth the effort.

Taxpayers should keep in mind that further guidance is expected. The list of states may also change as they amend their laws or regulations, which could bring them under the purview of New Jersey’s new convenience of the employer rule.

Mark H. Levin, CPA, MST own account, is a member of The CPA Journal Editorial Advisory Board.