What Are New Jersey’s Remote Worker Tax Rules?
For remote workers, New Jersey tax obligations depend on more than just residency. Understand how your work arrangement impacts your state tax liability.
The rise of telecommuting has introduced new questions for employees and employers regarding which state has the right to tax income. New Jersey has a specific set of regulations that address these modern work arrangements. These rules determine tax liability based on a combination of factors, including the employee’s state of residence and the physical location where the work is performed.
Understanding these rules is important for personal tax filings and the responsibilities of businesses that employ a remote workforce.
New Jersey’s Response to “Convenience” Rules
New Jersey’s policy for taxing remote workers is a direct, reciprocal response to the tax laws of other states. Following a law enacted in July 2023, New Jersey applies another state’s “Convenience of the Employer” rule back to the residents of that state. This means New Jersey’s ability to tax a nonresident employee working remotely depends on whether the employee’s home state has such a rule.
The “Convenience of the Employer” standard sources an employee’s income to their employer’s office if they work from an out-of-state location for personal convenience rather than as a requirement of the employer. New Jersey’s reciprocal approach affects employees from states with convenience rules, such as New York, Delaware, and Nebraska. This policy, which took effect retroactively to January 1, 2023, does not impact residents of states with which New Jersey has a separate reciprocal tax agreement, such as Pennsylvania.
Tax Scenarios for Individuals
New Jersey Residents Working for an Out-of-State Employer
New Jersey residents are subject to tax on all of their income, regardless of where that income is earned. A resident who works for a company based in another state must report that income on their New Jersey tax return. This situation can become complicated when the employer is located in a state with a “Convenience of the Employer” rule, such as New York.
For instance, a New Jersey resident working from home for a New York company for their own convenience will have their income sourced to New York. The employer is required to withhold New York taxes, and the employee must file a New York non-resident tax return, creating a situation where the same earnings are taxed by both states.
Non-Residents Working for a New Jersey Employer
The tax implications for non-residents working for a New Jersey employer depend on the “Convenience of the Employer” rule. If a non-resident lives in a state that has its own convenience rule and works remotely for a New Jersey employer for personal convenience, their wages are sourced to New Jersey. These earnings are subject to New Jersey income tax, and the employer must withhold those taxes.
Conversely, if the remote work arrangement is a necessity of the New Jersey employer, the income is not sourced to the state. An example of necessity would be if the employer required the employee to work from their home office because it serves as a bona fide business location for the company.
Available Tax Credits
New Jersey provides a credit for taxes paid to other jurisdictions to alleviate the burden of double taxation. This credit is available to New Jersey residents who paid income tax to another state on earnings that are also taxable in New Jersey. The credit reduces a resident’s tax liability by the amount of tax paid to the other state, but it cannot exceed the amount of tax New Jersey would have imposed on that income. To claim this relief, taxpayers must file Schedule NJ-COJ with their return and provide proof of the tax paid.
A separate refundable tax credit was established for tax years 2020 through 2023. This is for residents who successfully challenge another state’s taxation of their income earned while physically in New Jersey. To qualify, a taxpayer must be denied a refund from the other state, appeal the decision, and receive a final judgment. The credit is equal to 50% of the additional tax owed to New Jersey that results from the readjustment.
Employer Withholding Obligations
Employers in New Jersey must withhold Gross Income Tax from the wages of certain non-resident employees who work from home. This obligation is triggered when a non-resident employee works remotely for their own convenience and lives in a state that has its own “Convenience of the Employer” rule. A misclassification could lead to incorrect withholding, making the employer liable for any tax that should have been withheld.
To support their decisions, businesses should maintain clear documentation regarding each employee’s work arrangement, such as telework agreements. For guidance on calculating the correct amount to withhold, employers can refer to the tables and methods provided in the New Jersey Gross Income Tax Instructions for Employers.