On July 21, 2023, the New Jersey legislature enacted AB 4694 (P.L.2023, c.125) (NJ AB 4694) to adopt a "convenience of the employer" sourcing rule for nonresident employee wages, but only for states that maintain the same "convenience of the employer" rule.
Generally, employers withhold state and local income taxes based on where employees physically perform services, but exceptions are growing. For example, some states have reciprocity agreements which permit withholding in a single state for employees who work and live in different states. States that apply the "convenience of the employer" rule generally deem out-of-state employees working for an in-state employer to accrue state income tax liability primarily to the state in which the employer is located, unless working out of state is required by their employer. Employers must withhold accordingly, and affected employees often need to file income tax returns in both states.
Five states currently maintain a "convenience of the employer" rule: Connecticut, Delaware, Nebraska, New York and Pennsylvania. However, Pennsylvania and New Jersey have a reciprocity agreement which exempts residents of these states from withholding for services performed in the other state.
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