Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Effective October 1, 2021, the New Jersey Division of Taxation (the “NJDT”) ended the temporary relief period with regard to employers’ obligation to withhold income taxes for teleworking employees who work in New Jersey.1 Employers must therefore stop basing their obligation to withhold and remit income taxes on the employer’s jurisdiction, and instead should do so based on where the employee’s service or employment is performed. If that location is New Jersey, employers should withhold New Jersey taxes from such wages.
Under New Jersey law, income is sourced to the state based on where the service or employment is performed. During the pandemic, however, New Jersey modified its rules to reflect the realities of at-home remote work when employees were precluded (either by executive order or by recommendation from public health authorities) from working from their normal office location if that normal office location was outside of New Jersey.
Specifically, on March 30, 2020, the NJDT issued temporary guidance that waived corporate nexus for out-of-state businesses if employees worked from their home in New Jersey solely because of the ongoing COVID-19 pandemic. The NJDT stated:
As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer's social distancing policy, no threshold will be considered to have been met.2
Effective October 1, 2021, however, this is no longer permitted. As a general reminder, if an item is considered employee compensation for purposes of federal income tax withholding, it is subject to income tax withholding in New Jersey. This includes, but is not limited to, wages, tips, salaries, commissions, and bonuses.3
New Jersey also has a very broad definition of “employment” in New Jersey, which:
shall include an individual's entire service performed within or both within and without this State if: (A) The service is localized in this State; or (B) The service is not localized in any state but some of the service is performed in this State, and (i) the base of operations, or, if there is no base of operations, then the place from which such service is directed or controlled, is in this State; or (ii) the base of operations or place from which such service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this State.4
This means, by way of example using an employee who is and has been solely working remotely from their home in New Jersey for a Florida employer, that the Florida employer likely will be required to withhold New Jersey taxes from the employee’s pay because either “(A) The service is localized in this State [New Jersey]” or “(B) The service is not localized in any state but some of the service is performed in this State, and ... (ii) the base of operations or place from which such service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this State.”5
One existing caveat that employers should continue to note is the reciprocity agreement between New Jersey and Pennsylvania. Under that agreement, employers “. . . are not required to withhold on compensation paid to Pennsylvania residents working in New Jersey if they file an Employee’s Certification of Nonresidence in New Jersey. . . .”6 “Similarly, a New Jersey resident working in Pennsylvania generally does not need Pennsylvania withholdings.”7
Employers are advised to consult with counsel to work through any questions that may arise related to employees working remotely in New Jersey and to plan for dealing with them proactively before year-end.
1 See New Jersey Division of Taxation, Teleworking – End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes, state.nj.gov (Aug. 3, 2021), https://www.state.nj.us/treasury/taxation/covid19-payroll.shtml; see also N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a).
2 News & Updates, New Jersey Division of Taxation, Tele-Commuting and Corporate Nexus (Mar. 30, 2021), https://www.state.nj.us/treasury/taxation/whatsnew.shtml.
3 This ASAP does not address the paid sick leave or New Jersey Family Leave Act implications which may apply if an employee is working remotely from their home in New Jersey. For more information on that topic, please see Amber Spataro, Dear Littler: How do we Know Which State’s Laws Govern the Leaves and Benefits for our Wandering Workers? (June 7, 2021).
4 2018 New Jersey Revised Statutes, Title 43 - PENSIONS AND RETIREMENT AND UNEMPLOYMENT COMPENSATION, Chapter 21, Section 43:21-19 – Definitions, https://law.justia.com/codes/new-jersey/2018/title-43/chapter-21/section-43-21-19/.
6 New Jersey Division of Taxation, New Jersey Income Tax Withholding Instructions, https://www.state.nj.us/treasury/taxation/pdf/current/njwt.pdf (last visited Oct. 21, 2021).