Living and Working in New York, New Jersey & Connecticut – The Impact of the Convenience of the Employer Test

The summer of 2021 held promise for moving past COVID-19 restrictions and returning to normal. Unfortunately, the Delta variant did not get the memo and has plunged the world back into uncertainty. Many states are rolling back temporary measures they instituted at the height of the pandemic to require businesses to withhold income tax on employees working from home outside the state in which they normally work. Multiple questions remain regarding how businesses should treat employees who are not fully returning to the office. For New York, New Jersey and Connecticut, this is a highly contested area due to the proximity they share and the tax dollars at stake.

For personal income tax purposes, employees are generally taxed by a state based on the location where they perform their services. However, certain states impose a “convenience of the employer” test, which allows the state to tax employees as if they were working from their primary office location, even if they are actually working out of state. From the state’s perspective, the rationale for this test is employees are performing their duties outside their principal office (generally working from home) for their own convenience. Therefore, their time should count as a normal workday unless working outside of their primary location is a necessity of the business.

Historically, New York has used the convenience of the employer test to determine when withholding tax needs to be collected for employees working remotely. New York requires New York state income tax to be withheld from all wages paid to an employee if the reason the employee is working from home outside the state is for the employee’s convenience, unless an exception is met. Even when pandemic lockdowns meant employees had to work from their homes in other states, New York did not suspend the convenience of the employer test.

Connecticut implemented its convenience of the employer test for tax years beginning on or after January 1, 2019. Connecticut will only impose the convenience of the employer test on workers who are residents of a state that also imposes the convenience of the employer test. In addition to Connecticut and New York, there are four other states that impose the convenience of the employer rule. These four other states are Delaware, Massachusetts, Nebraska and Pennsylvania.

New York has an exception from its convenience of the employer rule. If an employee’s home office qualifies as a bona fide employer office, a day worked from the bona fide employer office will be considered a day worked outside New York. In TSB-M-06(5I), the state lists several factors that are used to determine qualification for a “bona fide employer office.” The factors are divided into primary, secondary and other factors. To qualify as a bona fide employer office, the office must meet either the primary factor or at least four of the secondary factors and three of the other factors. The primary, secondary and other factors are detailed here.

New Jersey residents working from home for New York companies due to the pandemic that do not meet an exception to the convenience of the employer test are still subject to New York income tax. New York employees working for Connecticut employers are still subject to Connecticut tax due to the Connecticut statute applying the convenience of the employer test to the resident of a state that applies the convenience of the employer test. New Jersey residents working from home for Connecticut companies will not be subject to Connecticut tax due to New Jersey not applying the convenience of the employer test.

Massachusetts adopted a temporary rule in April of 2020 that mirrors the convenience of the employer test. New Hampshire took issue with Massachusetts imposing tax on its residents for work done in New Hampshire and filed a motion for leave to file a bill of complaint in the United States Supreme Court on October 19, 2020. Over 14 states have filed amicus curiae briefs with the Supreme Court urging the Supreme Court to hear the case. On June 28, 2021, the United States Supreme Court denied New Hampshire’s motions for leave to file the bills of complaint and will not hear the case.

New Jersey was one of the states that joined the amicus brief due to the impact the New York convenience of the employer test has on New Jersey citizens working for New York employers. New Jersey provides a credit to New Jersey residents for income taxes paid to other states. In the amicus brief, New Jersey’s Office of Revenue and Economic Analysis estimates that New Jersey is likely to provide credits for taxes paid by New Jersey residents to New York while working from home between $928.7 million to $1.2 billion for 2020.

Following are several examples to show the withholding responsibility of a New York and Connecticut company that employs a New Jersey resident.

1. A New Jersey resident woks for a New York employer whose primary office is in New York. The New Jersey resident employee works from home two days a week and does not meet an exception to the convenience of the employer rule. The two days a week worked in New Jersey will be considered days worked in New York and the employer will withhold New York income tax on those days. The New Jersey resident will receive a New Jersey income tax credit for tax paid to New York on their New Jersey resident personal income tax return.
2. A New Jersey resident works for a Connecticut employer whose primary office is in Connecticut. The New Jersey resident employee works from home two days a week. Because New Jersey does not employ a convenience of the employer test, the Connecticut employer would not treat the two days a week worked in New Jersey as Connecticut work days and would not withhold Connecticut income tax on those two days a week. The company would withhold New Jersey income tax on the New Jersey workdays.
3. A New York resident works for a Connecticut employer whose primary office is in Connecticut. The New York resident employee works from home two days a week. Due to the fact that New York has the convenience of the employer test, the two days a week worked in New York will be considered days worked in Connecticut under the convenience of the employer test. The result is the employer will withhold Connecticut income tax on the two days the employee worked in New York. The New York resident will receive a New York income tax credit for tax paid to Connecticut on their New York resident personal income tax return.

Will the Supreme Court’s decision to not hear the New Hampshire case embolden other states to implement their own convenience of the employer tests to ensure they are capturing revenue for work performed within their state borders? Will Congress take action to ensure there is a uniform framework among the states that would strike down the convenience of the employer test?

On August 3, 2021, New Jersey provided guidance that the temporary suspension of withholding requirements for teleworking employees (along with Corporate Business Tax Nexus and Sales Tax Nexus determinations due to employees working from New Jersey under the stay at home orders) would end on October 1, 2021. After October 1, New Jersey will require employers to withhold income tax on employees working remotely from New Jersey.

As companies continue to evaluate the brave new world of having more remote employees, it is imperative to understand the state withholding requirements of the jurisdictions where their employees are located to ensure they are in compliance with state and local laws.

Weaver will continue to follow future developments. For more information, contact us. We are here to help.

© 2021