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Division of Taxation

Convenience of the Employer Sourcing Rule Enacted for Gross Income Tax

P.L.2023, c.125 was enacted on July 21, 2023 and establishes a “convenience of the employer test” (convenience rule) for nonresident income sourcing.

The new law only applies to employees who are residents of states that also impose a similar test, such as Delaware, Nebraska, and New York. Note that this list may change accordingly based on the laws of different states.

This legislation does not apply to Pennsylvania residents who work in New Jersey, since there is a Reciprocal Agreement in place with that state. New Jersey also recognizes that Connecticut law contains a convenience of the employer rule.  Upon review of this provision, which is codified in Conn. Gen. Stat. § 12-711, Connecticut’s convenience of the employer law is only implicated if the nonresident employee’s state of domicile uses a similar test.  In other words, it appears that Connecticut’s convenience of the employer rule is reciprocal, much like New Jersey’s newly enacted law.  Given the foregoing, and based on the reciprocal nature of Connecticut’s law, an employee who works from home in Connecticut for a New Jersey employer will not implicate New Jersey’s convenience of the employer rule. Although it is New Jersey’s expectation that Connecticut will adopt a similar position with regard to the application of its convenience of the employer rule to employees who work in New Jersey for a Connecticut employer, it is recommended that taxpayers and practitioners look for formal guidance from Connecticut.

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.

The new law is retroactive to January 1, 2023. Affected taxpayers must begin withholdings and/or making estimated payments for Tax Year 2023 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 waive penalty and interest, as long as the taxpayer is complying with the new law by September 15, 2023. Such waiver from penalty and interest in accordance with Convenience of the Employer Rule changes can only be granted once assessed and the taxpayer receives a notice. You should send your request for relief to the address listed on your billing notice and specify that you are requesting relief due to the Convenience of the Employer Rule changes.

Tax Credit for Challenging Another State’s Convenience of the Employer Rule

Last Updated: Wednesday, 11/22/23