New Jersey Strikes Back at New York’s “Convenience of the Employer” Rule

Last fall, New Jersey Governor Phil Murphy proposed a solution to the controversial issue that arose during the pandemic of how the income of remote workers of out-of-state companies should be taxed. New York’s longstanding “convenience of the employer” rule treats New York workers as providing services to their New York employers even when they work remotely from their New Jersey or Connecticut residences. Now New Jersey seeks to join Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania (in limited application) to look at the location of the employer, rather than where the services are actually performed.

The New Jersey Assembly has passed legislation, A.B. 4694, which would impose a reciprocal tax on nonresidents who work remotely outside of the state, for their convenience, for in-state employers. This means that if an employee’s state of residence determines the source of income of nonresidents by a “convenience of the employer test,” and the employee works for a New Jersey employer from a location in the employee’s state of residence for the employee’s own convenience, then the New Jersey employer would be required to include those days as days worked in New Jersey and withhold income tax accordingly.

The bill also provides for new credits for resident taxpayers:

• A refundable gross income tax credit would be available to New Jersey resident taxpayers who obtain a final judgment from another state tax court or tribunal in the resident taxpayer’s favor, resulting in the resident taxpayer being refunded taxes paid to that state or jurisdiction on the basis that the income was derived from services rendered while the resident taxpayer was within New Jersey. The credit would be equal to 50% of the amount of the taxes that are owed to New Jersey as a result of the readjustment of New Jersey’s credit for taxes paid to another state.

• The bill also establishes a nonrefundable gross income tax credit of $2,000 for individuals who seek from their employer and accept a reassignment from an out-of-state location to a New Jersey location. The bill caps the amount of tax credits that may be awarded to qualified taxpayers at $10 million per state fiscal year.

• Additionally, the bill establishes a pilot program, to be administered by the Economic Development Authority, through which the authority will provide grants to businesses to assign New Jersey resident employees to New Jersey locations. A business is eligible for a grant if the business has 25 or more full-time employees and is principally located in another state. The bill caps the sum of all grants awarded in any fiscal year at $25 million and makes an initial one-time appropriation from the General Fund for the grant program.

• Finally, the bill clarifies that its provisions would not affect any agreements entered into by the Division of Taxation with another state concerning the payment of income taxes by residents and out-of-state workers. State law currently allows the Division of Taxation to enter into agreements with the taxing authorities of another state to exempt New Jersey residents from the payment of income taxes to that state.

The bill will be considered by the state Senate next month for approval. We will keep you updated on the status of this bill as it progresses through the legislative process.

TECHNICAL INFORMATION CONTACTS:

Argi O’Leary
Principal
Ryan
212.871.3901
argi.oleary@ryan.com

Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.