On April 25, 2024, Nebraska Governor Jim Pillen approved LB1023, which effective January 1, 2025, amends the rules governing when nonresident compensation is included in Nebraska income subject to income tax and expands on the state's current ImagiNE program by providing a relocation tax incentive to employers and employees.

Nonresident income tax

Current law

Under current law (316 Neb. Admin. Code § 22-003.01C)), if an employee's services are provided outside of Nebraska for a Nebraska employer, and such remote work is for the employee's own convenience and not the necessity of the employer, all compensation for services provided to the Nebraska employer are included in wages subject to Nebraska income tax and income tax withholding. Nebraska's current "convenience of the employer rule" applies even if the employee is not physically present in the state in the tax year.

Current law also does not exempt from taxable wages de minimis time spent in the state for employment-related activities, such as attending meetings or training, nor does it exempt compensation received by nonresident board members that relates to their board or governing body activities.

New law effective January 1, 2025

LB1023 provides some relief from nonresident income tax by amending 316 Neb. Admin. Code Section 22-003.01C as follows:

• Convenience of the employer rule. Wages for services provided by a nonresident for a Nebraska employer are subject to Nebraska income tax and withholding if all of the following apply:
  • Services are provided outside of the state for the employee's own convenience.
  • Services could be performed within the state.
  • Employee is present in the state for more than seven days during the tax year in which the compensation was earned.
• De minimis exemption for meetings and training. Wages paid for a nonresident's presence in the state to attend meetings, conferences or training events are excluded from wages subject to Nebraska income tax and withholding if all of the following are met:
  • The employee is present in the state for seven or fewer employment duty days during the tax year.
  • The individual performed employment duties in more than one state during the tax year.
  • Total compensation for meetings/training within the state does not exceed $5,000 in the tax year.
• Board of directors. Compensation paid to a nonresident individual serving on the board of directors or similar governing body of a business for services relating to board or governing body activities within Nebraska does not constitute income from sources derived within Nebraska.
• Employer relief from penalties/interest for failing to withholding Nebraska income tax. Employers will not be assessed penalties or interest for failing to withhold Nebraska income tax from wages if they comply with one of the following:
  • In its sole discretion, the employer maintains a time and attendance system that is specifically designed to allocate wages for income tax purposes to all jurisdictions in which the employee performs services and the employer relied on this system when it failed to withhold.
  • The employer does not maintain a time and attendance system but instead relies on:
    1. Its own records concerning employee work location maintained in the regular course of business (for example, travel records, travel expense reimbursement records)
    2. A reasonable determination of the time an employee is expected to perform services within Nebraska, provided that the employer did not have actual knowledge of fraud and the employer and employee did not conspire to evade Nebraska income tax in determining the work location
    3. A written statement from the employee showing the number of days spent performing services within Nebraska during the tax year

Relocation tax incentives

To attract more workers to Nebraska, LB1023 provides a tax incentive for both employers and employees based on relocation costs incurred in accepting employment within Nebraska.

Employer relocation tax credit

A credit of 50% of the relocation expenses paid for a qualifying employee, up to $5,000 per employee, per tax year, is available to employers reimbursing employees for relocation costs they incur by accepting a job within Nebraska. The tax credit may be offset against the employer's income tax, premium and related retaliatory taxes or franchise taxes owed. A qualifying employee is one who receives an annual salary of at least $70,000 but not more than $250,000 per year (to be indexed for inflation beginning January 1, 2026).

Employers must apply for the relocation tax credit through the Nebraska Department of Revenue (DOR), which will approve applications on a first-come, first-serve basis until the budget limit of $5 million dollars is reached.

The credit will be recaptured by the DOR if the qualifying employee leaves Nebraska within two years after the credit is claimed. Reclaimed credits are due and payable with the tax return that is due immediately following the employee's loss of residency.

Employee relocation tax credit

Qualified employees can make a one-time election to exclude from wages subject to Nebraska income tax all Nebraska-sourced wages that are included in federal adjusted gross income.  The election must be made within two calendar years of becoming a Nebraska resident. A qualifying employee is one who receives an annual salary of at least $70,000 but not more than $250,000 per year (to be indexed for inflation beginning January 1, 2026) and the employee was not a resident of Nebraska in the year prior to the year that residency is claimed.

The credit will be recaptured by the DOR if the qualifying employee fails to maintain residency for two full calendar years following the calendar year in which the exclusion was taken. Recaptured credits are considered an underpayment of tax that Is payable on the tax return that is due immediately following the loss of residency.

Ernst & Young insights

Of the states that impose the convenience of the employer rule, only New York, and now Nebraska stipulate that the rule applies only if there is some physical presence in the state during the tax year.

Nebraska joins several US jurisdictions that offer incentives to recruit new residents. Examples include the following:

• Louisiana. SB 157, enacted in 2021, provides a Louisiana income tax exemption of 50% of gross wages up to $150,000 to qualifying remote workers (referred to as "digital nomads") who establish residency within the state after December 31, 2021. This exemption applies for a period of up two years from 2022 through 2025 and only to those wages earned from remote work. The provision was enacted for purposes of Louisiana economic development. (See Tax Alert 2021-1346.)
• New Jersey. A. 4964, enacted in 2023, creates a pilot program administered by the Economic Development Authority to 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. (See Tax Alert 2023-1291.)
• Vermont. Employees who have recently moved, or plan to move to Vermont, may still be eligible for a relocation expense reimbursement grant of up to $7,500 through the state's "ThinkVermont" Worker Relocation Incentive program. (See Tax Alert 2023-1271.)
• West Virginia. "Ascend WestVirginia" offers an incentive of $12,000 and one year of free outdoor recreation to remote workers moving to the state. Additionally, as incentive to employers, tax reforms were made under H.B. 2026 (2021), which, effective January 1, 2022, included an exemption from nonresident income tax for employment within the state of 30 or fewer days in the year. (See Tax Alert 2021-0799.)
• Cities. Some cities also offer cash incentives to attract remote workers: Shoals area, Alabama; Topeka, Kansas; and Tulsa, Oklahoma.