by David Engel
The New Jersey Division of Taxation has issued initial guidance on the adoption of the convenience of the employer rule and its retroactive application. (Convenience of the Employer Sourcing Rule Added for Gross Income Tax Purposes, N.J. Div. of Taxation, 08/04/2023.)
Convenience of employer rule.
P.L. 2023, c. 125 was enacted on July 21, 2023, and established a convenience of the employer test (convenience rule) for nonresident income sourcing (see State Tax Update, 07/24/2023.) The new law only applies to employees who are residents of states such as New York that also impose a similar test. The new law does not apply to Pennsylvania residents who work in New Jersey, since there is a Reciprocal Agreement in place with that commonwealth. Under the convenience rule, a nonresident taxpayer’s employee compensation from a New Jersey employer for the performance of personal services is sourced to the employer’s location (New Jersey) if the employee is working from an out-of-state location (e.g., at home in their resident state) for their own convenience rather than for the necessity of their employer. In determining whether compensation earned by a nonresident telecommuting for a New Jersey employer will be deemed New Jersey sourced income, New Jersey will apply a similar rule which would be the same as the triggering state’s rule. For example, compensation earned by a New York resident telecommuting for a New Jersey employer will be deemed New Jersey sourced income by applying the New York “convenience of the employer” test.
New York’s convenience of the employer test.
Since New Jersey has advised that it will apply New York’s guidance, a summary of New York’s guidance helps explain New Jersey’s convenience of the employer test, which is intended to be a mirror of New York’s test. Under New York’s test, as explained in New York Technical Service Bureau Memorandum No. TSB-M-06(5)I, 05/15/2006, if a nonresident employee performs services for his or her employer both within and without New York State, his or her income derived from New York State sources includes that proportion of his or her total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number of working days employed both within and without New York State. However, any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his or her employer. In the case of a taxpayer whose assigned or primary office is in New York State, any normal work day spent at the home office will be treated as a day worked outside the state if the taxpayer’s home office is a bona fide employer office (as determined below). Any day spent at the home office that is not a normal work day would be considered a nonworking day. If the employee’s duties require the use of special facilities that cannot be made available at the employer’s place of business but those facilities are available at or near the employee’s home, then the home office will meet the primary factor test and will qualify as a bona fide employer office. Otherwise the employee must meet four of the following tests: (1) the home office is required as a condition of employment; (2) the employer has a bona fide business purpose for the employee’s home office location; (3) the employee performs some or all of the core duties of his or her employment at the home office; (4) the employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office; (5) the employer does not provide the employee with designated office space or regular work accommodations at one of its regular places of business; and (6) the employer reimburses the employee for 80% or more for the expenses for the employee’s space.
Retroactive application of law.
New Jersey’s new law is retroactive to January 1, 2023. Affected taxpayers must begin withholdings and/or making estimated payments for the 2023 tax year as soon as possible and are required to have proper tax paid by April 15, 2024. Employers should consider making adjustments to withholdings as an accommodation to employees, so that they are not underpaid. The Division will not impose penalty and interest, as long as the taxpayer begins complying with the new law as of September 15, 2023.
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