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New Jersey Overhauls Withholding Tax Rules – Is Your Payroll Department Ready?

Aug 9, 2023

On July 21, 2023, Governor Phil Murphy approved a law called Assembly Bill 4694. This law aims to redirect tax that is currently being siphoned by New York’s convenience of employer rule.

What is Convenience of Employer

Employers generally withhold and remit employee income taxes to the state where the services are performed. An employer in State A, with an employee working in State B, should generally withhold and remit income taxes to State B.

However, if an employer domiciled in a state with a convenience of employer rule, like New York, has an employee working outside of New York for the employee’s convenience, then they would still withhold New York tax unless the employee was working out of state for the necessity of the employer.

Examples of Convenience of Employer 

  • I’m a New York employer. I just landed my biggest client who happens to be in Ohio. I need to hire someone in Ohio who can provide regular in person visits to my new client. That employee would be working in Ohio for my (the employer’s) convenience, so Ohio tax should be withheld and remitted.
  • Now let’s say I (still a New York employer) am looking for a payroll tax administrator. I search online and find a qualified individual in Ohio. The employee will work from home (Ohio) and once a quarter fly into New York for performance review and training. All of the employee’s wages, regardless of time spent in Ohio or New York, will be subject to New York tax withholding because they are not working in Ohio for the employer’s convenience.
  • Many New Jersey residents work for New York offices; maybe they were commuting before the pandemic and now work from home, or maybe they were hired as a remote employee. Unless there was a specific business reason for the resident to work in New Jersey, those wages are subject to New York tax based on New York’s convenience of employer rule.

What is Assembly Bill 4694

Highlights of the bill, which is generally retroactive to January 1, 2023, include the following:

  • New Jersey implements its own convenience of employer rule. This will subject nonresidents of New Jersey who work in New Jersey but reside in a state with a convenience of employer rule (i.e., New York) to New Jersey income tax and withholding for all services regardless of where rendered.
  • A nonrefundable individual tax credit for New Jersey resident employees who get reassigned from a work location outside of the state to a New Jersey location. It is a one-time credit of up to $2,000. Total credits issued is limited to $10 million annually (based on New Jersey’s fiscal year) and will be provided in the order applications are received.
  • A grant program, administered by the New Jersey Economic Development Authority, will issue awards to businesses principally located outside New Jersey who reassign New Jersey residents to work locations within the state. Qualified businesses will employee 25 or more full time workers and the grant will be valued at the lesser of New Jersey Gross Income Tax withheld from reassigned employees or $500,000. The sum of all grants issued in the State’s fiscal year cannot exceed $35 million.
  • For tax years January 1, 2020 through January 1, 2024, a New Jersey resident who successfully protests a denial by another state or jurisdiction of a refund for taxes paid on income derived from services rendered within New Jersey, will be entitled to a tax credit equal to 50% of the refund owed to New Jersey as a result of readjustment.

What Your Payroll Department Needs to Know about Assembly Bill 4694

First, if you are a New Jersey employer and have New York residents working from home, those wages may now be subject to New Jersey withholding unless the work is performed outside New Jersey for the necessity of the employer.

Second, while the New Jersey convenience of the employer rule is all the buzz, it is the $2,000 individual credit that could pose the most issues for New Jersey taxpayers – both businesses and individuals. One cannot simply decide they are no longer affiliated with a New York office. Likewise, employers cannot just switch an employee from New York to New Jersey. While the Garden State will not object to this, New York certainly will.

In order for a New Jersey employee’s home office to be considered a bona fide employer office in the eyes of New York, certain factors must be met. The primary factor is whether the home office is near, or contains, specialized facilities that are not available at the New York office. If you meet the primary factor then it is an employer office and no other factors need be considered. If the primary factor is not met, then the office must meet at least four secondary factors and three other factors.

Secondary factors include:

  • Home office is required as condition of employment
  • Employer has bona fide business purpose for the employee’s home office location
  • Employee performs some core duties of employment at the home office
  • Employee meets with customers on a regular basis at the home office
  • Employer does not provide the employee with workspace at its regular place of business
  • Employer reimburses for home office expenses

Other factors:

  • Employer maintains separate phone lines at the home office
  • Home office is listed on business letterhead/business cards
  • Employee uses specific area of the home exclusively to conduct business
  • Employee stores inventory and/or product samples in home office
  • Employer business records are stored in the home office
  • Home office has a sign indicating a place of business
  • Employer advertises the home office as a business location
  • Home office is covered by employer’s insurance policy
  • Employee claims home office expenses on Federal tax return
  • Employee is not an officer of the company

These factors are directed towards home offices, but what if your company is headquartered in New York with a secondary office facility in New Jersey? Can you assign employees from the New York office to the New Jersey office?

New York does not have a specific checklist or test for this situation but the same principles apply. Employers must establish a business purpose for the reassignment and make sure it is documented. Websites (including LinkedIn), business cards, email signatures, and other public facing records should be updated to reflect the new work location. Employers should also review affiliations with local chapters of professional organizations to ensure they are consistent with assigned offices.

Affected taxpayers are required to have proper tax paid to New Jersey by April 15, 2024, however the New Jersey Division of Taxation announced it will not impose penalty and interest if the taxpayer is compliant as of September 15, 2023.

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Vincent M. Occhino

Vincent Occhino is a Manager in the State and Local Tax Group. His specific areas of service encompass nexus studies, income/franchise tax refund reviews, multi-state tax planning, and cost of performance studies.

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