When the COVID-19 pandemic began, restrictions on travel and public interactions meant that millions began working from home out of necessity. An unintentional consequence of that period of time sparked a new trend: working from home for the sake of personal preference and convenience, rather than compliance. As the workforce began filtering back into offices across America, many stayed behind their laptop cameras in their homes. Perhaps the largest beneficiaries of jobs with lenient remote work policies are far-traveling commuters. With gas prices rising, highways under construction, and families at home, it’s not hard to see why some workers are jumping on the opportunity to work online from wherever they choose. However, this trend has brought about some unique questions for lawmakers in the State of New Jersey, as well as the Internal Revenue Service. If an employer’s business is located in New Jersey, but the employee works from their out-of-state home out of personal preference, what are the implications for state income tax?
What the New Law Says
This is what the latest New Jersey regulations are meant to address. P.L. 2023, c.125 was enacted this past summer on July 21. The purpose is to determine the source of income for nonresident employees who work remotely. The moniker for this rule is the “convenience of the employer test”, or the “convenience rule”. If it is determined that an out-of-state telecommuter employed in New Jersey is doing so purely out of convenience, then their income is sourced to the employer’s location in New Jersey. Therefore, the gross income tax an employee pays will include both New Jersey income tax as well as their resident state’s income tax.
If the convenience rule applies to your employment, keep in mind that you are not paying the full amount of both state’s income taxes combined; the New Jersey income tax you pay acts as a credit on your home state’s income tax. This works similar to the city wage tax that New Jersey residents owe while working in Philadelphia, for example. This may or may not be a full credit, depending on the tax rates of the states in question.
Example: If you live in Delaware and work remotely for a New Jersey company, you pay New Jersey tax. However, the tax credit on your Delaware return may be far less than the tax you pay to New Jersey, if the Delaware tax rate is lower than New Jersey’s. You only receive a credit for the tax that Delaware imposes, not necessarily for the tax you pay to New Jersey.
Thousands of workers from nearby states commute to New Jersey for work every day. The convenience rule that New Jersey has adopted is not meant to change the income tax that physical commuters are paying. This solely applies to telecommuters who are not explicitly directed to work from out-of-state by their New Jersey employers.
The convenience rule New Jersey has implemented follows suit from multiple other states across the country that have implemented their own versions of the convenience rule. For the area immediately surrounding New Jersey, this includes states such as Delaware and New York.
Exceptions to the Law
There are exceptions to the latest legislation.
- PENNSYLVANIA RESIDENTS: Reciprocal agreements exist between New Jersey and Pennsylvania that prevents all residents from having to pay the other state’s income tax in addition to their own state’s income tax (this is separate from the city wage tax, which is still owed for all residents regardless of state residency). Therefore, the convenience rule will not apply.
- CONNECTICUT RESIDENTS: While there are no formal reciprocal agreements in place between New Jersey and Connecticut, the state of New Jersey has announced that it will not be enforcing the convenience rule on Connecticut residents. This arrangement works vice versa for New Jersey residents telecommuting to Connecticut.
This law retroactively affects all income earned after January 1, 2023. This means that even if your employer withholds your taxes, it’s possible that the amount you owe may not have been withheld from the time period between January 1, 2023 (when the law retroactively begins to implement the tax) and July 21, 2023 (when the law was enacted). The taxes owed by New Jersey’s convenience rule are due by the normal tax filing date of April 15 in 2024. If these taxes are not paid by this time, penalties and interest may incur on your owed taxes. Additionally, taxpayers should remember that if a minimum of 80% of your owed taxes for 2023 is not paid by the April 15 2024 deadline, any extension of time to file tax returns is void.
Bowman & Company LLP has been helping clients manage risk, improve operations, and grow their businesses since 1939. As one of the largest accounting firms in the Delaware Valley, and the largest in Southern New Jersey, we have the specialization to serve all types of businesses and individuals. Our Commercial Services Department is comprised of tax specialists that can help you with any related business need.
Resources & Further Reading
- New Jersey Division of Taxation: “2023 Tax Law Summaries”
- New Jersey Division of Taxation: “Convenience of the Employer Sourcing Rule Enacted for Gross Income Tax”
- New Jersey Society of Certified Public Accountants: “New Jersey Enacts Payroll Tax ‘Convenience of Employer’ Rule”
John R. Culbertson, CPA, is a Partner of our Commercial Services Department that specializes in a wide range of tax matters for businesses and individuals.