Hunton Employment & Labor Perspectives

If you are a New Jersey employer with remote employees in New York, Alabama, Delaware, or Nebraska, you should review New Jersey’s newly introduced Convenience of the Employer Rule to ensure you are properly withholding state income and payroll taxes for those remote employees.

Employers with a remote workforce are required to manage a complex compliance process in which they file payroll tax returns in each state where employees are located. This is further complicated when states introduce unique withholding tax rules, such as a Convenience of the Employer Rule. This rule generally imposes a state tax withholding requirement on certain employees working remotely in another state for their own convenience rather than the necessity of the employer.

In 2023, New Jersey adopted its own Convenience of the Employer Rule for sourcing nonresident income. The New Jersey rule applies only where the remote work state imposes its own similar Convenience of the Employer Rule on New Jersey residents, which includes New York, Alabama, Delaware, and Nebraska.

Under the New Jersey rule, if a remote employee works for a New Jersey employer, their compensation will be sourced to New Jersey and subject to New Jersey income and payroll tax withholding, if the employee is working remotely for their own convenience rather than the necessity of the employer. The New Jersey rule is retroactive to January 1, 2023, and has nonresident income sourcing and state income and payroll tax withholding implications for New Jersey employers.

As year-end approaches, New Jersey employers should review whether their remote employees working out-of-state will be subject to this new Convenience of the Employer Rule. Not only is this important to ensure nonresident employees have sufficient income sourced to New Jersey, but employers should also ensure that New Jersey income and payroll taxes are withheld from any New Jersey-sourced compensation due to the Convenience of the Employer Rule. Additionally, for companies that apply special sourcing rules when computing their state corporate income tax liability, there could be major implications in calculating the payroll factor.