New Jersey Enacts Payroll Tax "Convenience of Employer" Rule

By Jason Rosenberg, CPA, Withum – August 2, 2023
New Jersey Enacts Payroll Tax "Convenience of Employer" Rule

Enacted on July 21, 2023, New Jersey A4694 creates a “Convenience of Employer” rule, affecting both employers and employees for payroll tax reporting purposes. The new law is retroactive to Jan. 1, 2023, and will apply to nonresidents who have compensation from a “New Jersey employer” unless such services are required by the employer to be performed outside of New Jersey. The newly adopted Convenience of Employer rule only applies to employees who are residents of states that also impose a similar Convenience of Employer rule.

The evolution of remote work has been in the making for many decades, but Covid-19 put the Convenience of Employer rule in the spotlight. While most states source employee wages for payroll withholding purposes to the state where the employee performs the services, there are a handful of states, such as New York, with enacted laws that require nonresident wages to be sourced to the office of the state where the employee is assigned or is otherwise considered to be their primary office. Employees who work remotely in New Jersey but are subject to the New York Convenience of Employer rule would typically receive a New Jersey resident credit to offset double taxation. This resulted in New Jersey losing significant tax revenue to New York’s rule.

The bill sponsorship included Senator Jon Bramnick, who stated, “The signing of my legislation will turn the tables in the fight against New York State’s harsh treatment of New Jersey taxpayers. Republicans in the Legislature have fought for years to do something about New York’s heavy-handed tactics that abuse employees who live here but work for entities across the state line. This law is a good first step toward much needed reforms to end the current tax imbalance.”

As the New Jersey legislation was recently enacted, further guidance from the state will be necessary for defining a “New Jersey employer.” For instance, a New York resident employee may spend an equal portion of their time working for an employer with offices in New Jersey and Pennsylvania, in addition to working from home in New York, but it remains unclear if the employee would be considered earning compensation from a “New Jersey employer” and be subject to this rule. Additionally, the legislation provides an exception to the Convenience of Employer rule for when an employer “requires” such services to be performed outside of New Jersey. However, it is not clear what level of actions would be sufficient to satisfy the exception to the rule. The ambiguity of the legislation may result in potential taxpayer disputes.

Separate and apart from the Convenience of Employer rule, the legislation will offer a refundable gross income tax credit to New Jersey residents who can successfully dispute out-of-state tax on income derived from services performed by the resident taxpayer while within New Jersey. This requires that the taxpayer files an appeal with a tax court or tribunal in which the resident obtains a final judgement from the tax court or tribunal, resulting in the resident taxpayer being refunded.

The new law also incentivizes employers to relocate New Jersey resident employees to New Jersey locations. A business is eligible to apply if the business has 25 or more full-time employees and is principally located in another state. New Jersey has earmarked $35 million per fiscal year in grants which are limited to $500,000 per employer. The grant applications must be filed on or before July 1, 2028.

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It is vital that businesses review their payroll tax withholding tax policies as remote work continues to be commonplace. The risk of non-compliance of payroll withholding could be significant and may result in the employer being fully responsible for any deficiency in withholding tax, in addition to penalties and/or interest. Furthermore, “responsible persons,” such as an officer who exercises direct control, may have personal liability with respect to such withholding taxes.

As businesses analyze the potential impact of the legislation, they should also monitor for any subsequent guidance from the Division of Taxation.

Jason L. Rosenberg

Jason L. Rosenberg

Jason Rosenberg, CPA, CGMA, EA, MST, is a partner at Wiss. He is the leader of the NJCPA State Taxation Interest Group and serves on several other NJCPA committees.

This article was reprinted with permission from WithumSmith+Brown.