October 2, 2023
New Jersey Division of Taxation issues additional guidance on new convenience of the employer rule
In additional guidance on the state's new convenience of the employer rule, the New Jersey Division of Taxation (Division) has confirmed that wages earned by Connecticut residents while performing services from their Connecticut home offices for a New Jersey employer are exempt from New Jersey nonresident income tax.
The Division further explains that, while it expects that Connecticut will follow New Jersey's guidance, it recommends that employers and individual taxpayers look for formal guidance from Connecticut concerning an exemption from Connecticut nonresident income tax for New Jersey residents working from home for a Connecticut employer.
Under prior law, only the wages of nonresidents that were earned while physically present in New Jersey were subject to New Jersey income tax.
Retroactive to January 1, 2023, A.4694 established 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. States that currently impose the convenience of the employer rule are Alabama, Connecticut, Delaware, Nebraska, New York and Pennsylvania.
In August 2023, the Division issued initial guidance explaining that the convenience of the employer rule applies only to residents of Alabama, Delaware, Nebraska and New York (triggering states). Pennsylvania is not included in the triggering states because there is a reciprocal income tax agreement with New Jersey and, temporarily, Connecticut was also excluded because, like New Jersey, its convenience of the employer rule applies only if the resident state also imposes the rule.
The Division said it will not impose penalties and interest on employers and individual taxpayers that begin complying by September 15, 2023. (See Tax Alert 2023-1401.)
In its latest guidance, the Division confirms that New Jersey's convenience of the employer rule does not apply to residents of Connecticut because "Connecticut's convenience of the employer rule is reciprocal, much like New Jersey's newly enacted law."
Ernst & Young LLP insights
In the absence of guidance from Connecticut concerning the applicability of its convenience of the employer rule to New Jersey nonresidents, Connecticut employers with employees working from their New Jersey home offices should speak to their tax advisor about the requirement to withhold Connecticut nonresident income tax.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor