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July 21, 2023

New Jersey implements "convenience of the employer rule" for certain nonresident employees, provides tax incentives to certain taxpayers and businesses

On July 21, 2023, New Jersey Governor Phil Murphy signed into law A.4694, which, retroactive to January 1, 2023, establishes a "convenience of the employer rule," subjecting New Jersey nonresidents assigned to work primarily for a New Jersey employer to New Jersey state income tax and withholding. The law applies only to New Jersey nonresidents who are residents of states that also have a convenience of the employer rule.

Previously, the wages of nonresidents were subject to New Jersey income tax only on wages earned while physically present in New Jersey.

Refundable gross income tax credit

The law creates a refundable gross income tax credit for New Jersey residents who receive a refund of taxes paid to another state on the grounds that the income was derived from services performed by the resident taxpayer while within New Jersey. This credit equals 50% of the amount of taxes owed to New Jersey as a result of the readjustment for tax years 2020 through 2023. This could incentivize New Jersey residents to challenge New York's stance on the "convenience rule" during the COVID-19 pandemic period.

Grants to businesses located outside of New Jersey

A pilot program administered by the Economic Development Authority will provide grants to businesses that assign 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 outside of New Jersey. The cap for all grants per fiscal year is $35 million and all grant applications must be filed on or before July 1, 2028.

New period of limitations for readjustment of tax of another state or political subdivision

The law amends N.J.S.A. 54A:4-1(e) to create an explicit one-year limitation period for reporting "readjustments" by other states. The default statute of limitations for claiming a credit or refund (N.J.S.A. 54A:9-8(a)), is (1) three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later or (2) three years from when the tax was paid if no return was filed. Under N.J.S.A. 54A:4-1(e), a taxpayer must send the New Jersey Division of Taxation a notice of a readjustment of tax owed to another state or political subdivision, even if such redetermination is beyond the normal statute of limitations. The law allows a taxpayer to readjust the credit when another state changes or corrects income either within the statute of limitations period or within one year from "the date the taxpayer received notification that the other state's income tax was due," whichever period expires later. This means that if the default statute of limitations has expired, a taxpayer has only one year from notification by the other state to claim an additional credit from New Jersey.

Please note that pursuant to Bonanno v. Dir., Div. of Taxation, 12 N.J. Tax 552 (Tax Ct. 1992), if a taxpayer fails to claim a credit for taxes paid to other jurisdictions on their return, then a determination by another state that a taxpayer owes tax to that state is not a "readjustment," and the default statute of limitations is not extended. For example, if a New Jersey resident fails to claim a credit for taxes paid to other jurisdictions on their return, and four years after filing the return, New York determines the taxpayer owed taxes to New York, the taxpayer cannot claim a credit on that adjustment by New York, because it is not deemed a "readjustment."

Ernst & Young LLP insights on the convenience of the employer rule

In most states, the default rule is that employees who are residents of one state (State A) but work for an employer in another state (State B), are taxed by State B only on wages earned for days the employee is physically present in State B. However, if State B has a "convenience of the employer rule," a State A resident working within State A for an employer in State B is subject to State B nonresident income tax for all wages earned in State A and State B.

Although New Jersey's new law applies to residents of any state that imposes the convenience of the employer rule, it will have the greatest impact on New York and Connecticut residents working remotely for a New Jersey employer.

Even before the COVID-19 pandemic, New York State had a "convenience of the employer rule" for nonresident employees assigned to work primarily for a New York employer if work was performed in the resident state for the employee's own convenience and not the necessity of the employer. (20 NYCRR Section 132.18(a).) The most obvious of such occurrence is work from home days, which have become increasingly prevalent since COVID-19.

Beginning in tax year 2019, Connecticut instituted a convenience of the employer rule sourcing income to Connecticut where nonresidents, assigned to work in Connecticut, work outside of the state for their own convenience and not the necessity of the employer. Like the New Jersey law, Connecticut's convenience of the employer rule applies only if the employee's resident state also has a convenience of the employer rule. (Connecticut Department of Revenue; Conn. Gen. Stat. § 12-711.)


Contact Information
For additional information concerning this Alert, please contact:
Indirect Tax
   • Yud Harrindranauthyud (
   • Steven Colby (
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor