On August 3, 2021, New Jersey issued temporary guidance suspending corporate income and sales tax nexus relief in response to the pandemic. In addition, the updated guidance also applies to payroll tax withholding requirements for employers.
Overview
During the early days of the pandemic, New Jersey issued temporary guidance in a March 2020 alert on its website that the division would temporarily waive nexus for employers with employees working from home in New Jersey. In addition, for payroll tax withholding, the Division of Taxation had previously announced that “during the temporary period of the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.”
Based on New Jersey’s updated guidance, effective October 1, 2021, the nexus and payroll tax withholding relief is set to be discontinued. Therefore, the pre-pandemic nexus standards will apply even when an employee is working from home due to COVID-19. Furthermore, for payroll tax withholding purposes, the updated guidance says, “employers should resume sourcing income based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages.”
As such, the suspension of the COVID-19 relief may result in double state payroll tax withholding obligations if the employee is subject to another state’s “Convenience of Employer” rules. For example, as we have previously written about, New York’s Convenience of Employer rule treats employee wages of a home workday as sourced to New York if an employee is assigned or otherwise deemed to be assigned to the employer’s New York office. As such, an employee who is “assigned” to the New York office, but is telecommuting from New Jersey, as of October of 2021, may be subject to payroll tax withholding in both New York and New Jersey.
Nevertheless, even if a New Jersey resident is now subject to double state payroll tax withholding requirements, New Jersey is known to provide a more generous resident credit. Atypical to many states, a New Jersey resident credit may be claimed even for taxes imposed on compensation for services that have been performed in New Jersey. Provided this, a New Jersey resident may be able to claim a refund for double taxation when they file their tax return. However, based on the updated New Jersey guidance, there may be some uncertainty if employers who are still obligated to withhold New York tax under the “Convenience of Employer” rule on New Jersey residents; would still be required to withhold in New Jersey, considering that New Jersey doesn’t normally require withholding on New Jersey residents who are “employed totally outside New Jersey” and are “subject to the withholding tax of that state.”
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It is vital that businesses review their nexus and withholding tax policies as states continue to update their guidance with respect to telecommuting. The remote or hybrid employment model is anticipated to remain even as businesses emerge from the pandemic. Remote work can have a significant impact with state and local tax, affecting state nexus, apportionment, sales sourcing, in addition to other implications.
Author: Zhoudi Tang, CPA, MST | [email protected]
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