NJ To End Work-From-Home Tax Waivers For Out-Of-State Businesses

TRENTON, NJ — Out-of-state businesses will have to resume withholding income taxes for New Jersey workers who telecommute beginning Oct. 1, as New Jersey ends temporary suspensions and waivers of some corporate business taxes.

The New Jersey Division of Taxation announced the changes on its website Aug. 3. In addition to the requirement to withholding income taxes, companies also will have to pay corporate taxes based on the percentage of employees who work in New Jersey and, for out-of-state sellers, sales taxes on sales generated by New Jersey-based employees.

All three rules were suspended when companies moved to having workers work from home for public health reasons during the early weeks of the pandemic.

"As required under the long-standing pre-pandemic rules, beginning on and after October 1, 2021, employers should resume sourcing income based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages," the statement said.

That means companies that have only been withholding income taxes for telecommuting workers based on their home state's laws will now have to withhold New Jersey income taxes. New Jersey bases its income taxes on where the work is performed.

For employees whose companies are based in New York, which requires income tax withholding from New Jersey employees who work from home as a matter of convenience, New Jersey will again give those employees a credit on their income taxes, New Jersey Spotlight reported.

The report said New York insists on charging income tax to employees of New York-based companies whether they work from home or in a New York office, and usually New Jersey employees only pay the New York income taxes, which are a higher rate.

New York is not the only state that insists on charging income tax to workers who live in another state. The New Jersey Herald reported New Hampshire filed a lawsuit against Massachusetts over the issue; it reached the U.S. Supreme Court but the Supreme Court refused to hear the case, New Jersey Spotlight reported.

A bill introduced in the House of Representatives in January would bar states from charging income taxes to workers who live in other states and telecommute, but the bill has not been acted on since it was introduced.

In addition to the change in income tax withholding, out-of-state companies also will have to pay corporate business taxes if they have employees who work in New Jersey. That tax rate is 9 percent on adjusted entire net income or on the portion allocable to New Jersey, according to the Division on Taxation. That rule had been suspended for companies whose employees were working from home solely because of the pandemic.

Similarly, the state had waived sales taxes on out-of-state sellers who had employees working in New Jersey solely because of the pandemic. That waiver ends Oct. 1 as employees still working from home for out-of-state sellers will be considered giving those sellers a physical presence in the state, the Division of Taxation said.

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