On July 21, 2023, New Jersey Governor Phil Murphy signed Assembly Bill No. S3128/A4694 into law,1 which implements an aggressive tax treatment of nonresidents who work for New Jersey employers. The law essentially adopts the Convenience of the Employer rule. The law further provides a tax credit for resident taxpayers who owe income or wage taxes to outside states. Additionally, the law establishes a pilot grant program, administered by the New Jersey Economic Development Authority, to incentivize businesses to assign New Jersey resident employees to work within the state. Under the program, such businesses will be required to commit to providing bonuses or increased compensation to employees who agree to physically relocate to New Jersey work locations.
What Is the Convenience of the Employer Rule?
The Convenience of the Employer rule is a state income tax principle providing that employees residing in a different state from their employer’s location may be required to pay state taxes in both their resident state and the state of the employer. Essentially, employees may be subject to double taxation (unless such state has no income tax). Another exception to the Convenience of the Employer rule is when the nonresident employee works from an out-of-state location due to the necessity of the employer, rather than the employee’s own personal reasons. In such scenario, an employee would not be subject to double taxation.
The Convenience of the Employer rule is employer-friendly, and the intention behind the rule is to ease the management of remote workers and further prevent tax evasion by remote workers. That said, this rule primarily affects remote workers and has gained traction in recent years, following the work-from-home model implemented by most employers as a result of the COVID-19 pandemic.
Currently, only five states have adopted the Convenience of the Employer rule: Arkansas, Delaware, Nebraska, Pennsylvania, and New York. Connecticut has a flexible version of the rule, where the rule applies only if the state where the employee is working has similar tax laws. As written, New Jersey’s law mirrors Connecticut’s version of the rule, and applies only to states that also have their own version of the Convenience of the Employer rule.
New Jersey Implications
New Jersey’s neighboring state—New York—has maintained the Convenience of the Employer rule for decades. But unlike its counterpart in Connecticut, New York’s version of the rule applies regardless of whether a state has a similar rule. Such an unrequited version of the rule has allowed New York to collect taxes from employees working for New York companies, even when they are working remotely from New Jersey.
According to U.S. Representative Josh Gottheimer who backed the law, approximately 400,000 New Jersey residents work in New York City and pay as much as $3.7 billion a year in New York taxes. Similarly, the law will now allow New Jersey to recuperate an estimated $1 billion dollars in lost tax revenue from out-of-state residents who work for New Jersey companies, including New York workers.
Who Is Entitled to the New Jersey Tax Credit?
The law provides that, for the taxable years beginning on January 1, 2020, but before January 1, 2024, for any resident taxpayer who: (1) pays income or wage tax for the taxable year by another state; (2) applies for and is denied a tax refund from that state for taxes paid to that state while the resident was within New Jersey; (3) files an appeal with a tax court or tribunal disputing the denial of the requested refund; and (4) obtains a final judgment from the tax court or tribunal resulting in the taxpayer being refunded on taxes paid to the other state, then such resident shall be allowed a credit against the tax otherwise due for the taxable year in an amount equal to 50 percent of the refunded amount.
Who Is Eligible for the Pilot Grant Program?
Under the law, the New Jersey Economic Development Authority has budgeted $35 million to award to businesses that reassign their employees who are New Jersey residents who perform work in other states, to work locations within New Jersey. Eligible businesses must apply before July 1, 2028, have 25 or more full-time employees, and be principally located in another state. Approved entities will be awarded up to $500,000, which can be used to pay bonuses and/or increased compensation to employees who relocate to New Jersey.
Given the purview of the law, there are various implications that employers, staffing agencies, and even recruiters should be aware of. Prior to New Jersey adopting the Convenience of the Employer rule, New Jersey employers were advised to tax employees where the employees worked. Now, employers will need to rethink this guidance, especially as it pertains to remote workers.
Employers should continue to monitor any supporting regulations that may be released in the future to provide further guidance on this law and shall consult with counsel to ensure proper compliance.