Digital nomad working for an employer in NJ, considering establishing domicile in South Dakota

[rryanc25]

Hello,

I have been travelling full-time for over a year and have spent very little time in NJ.

If I establish domicile in South Dakota (no income tax) I will have to file a nonresident return to NJ. On this form, column A reports total income and column B reports "NJ-source Income"

I have seen conflicting definitions on NJ-source income.

Would it be appropriate to report NJ-source income as income earned while physically working in NJ?

Or is income from a NJ based employer NJ-source on its own?

Any help will be greatly appreciated.

[Opus 17]

New Jersey applies a version of the convenience of the employer rule, but it does not apply to South Dakota.

https://www.state.nj.us/treasury/taxation/conveniencerule.shtml

If your domicile is in New Jersey, and you have been temporarily away, your income is taxed in New Jersey (NJ-source).  To change domiciles, you must not only set up a new domicile but take active steps to abandon your prior domicile.  Until you abandon your NJ domicile, you are an NJ resident and all your world-wide income is taxed in NJ.

After you establish a new domicile, your income will only be taxed as NJ-source if your new state also uses the convenience of the employer test.  Since South Dakota does not use this test, your income after you change domiciles will not be taxed in NJ.  When you prepare your tax returns, you would file a part-year resident NJ return, and you will need to manually allocate your income (Turbotax can't guess for you). 

After you relocate, income will only be considered NJ-source if it is earned or paid while you are physically living or working in New Jersey, such as if you are required to be on site for training or meetings periodically.  

If you are not currently domiciled in New Jersey, your income for the whole year would not be NJ income, unless you are in one of the other states that also uses a convenience of the employer test. 

[rryanc25]

Thank you for the thorough response. My understanding is that I will file a part year resident NJ return for the beginning of the year and then a non-resident return for the remainder of the year. I'm thinking the NJ-1040NR column B should include $0 income - as I did no work physically in NJ - triggering a refund of any excess taxes paid.

Am I following that correctly?

Is it possible to have my NJ employer stop withholding NJ taxes once I relocate?

Thanks again!

[Opus 17]

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@rryanc25 wrote:

Thank you for the thorough response. My understanding is that I will file a part year resident NJ return for the beginning of the year and then a non-resident return for the remainder of the year. I'm thinking the NJ-1040NR column B should include $0 income - as I did no work physically in NJ - triggering a refund of any excess taxes paid.

Am I following that correctly?

Is it possible to have my NJ employer stop withholding NJ taxes once I relocate?

Thanks again!

---

Yes, it does appear that if you move out of NJ during the year, but continue to have NJ-sourced income, you file both a regular tax return and an NR tax return.

https://www.state.nj.us/treasury/taxation/njit26.shtml

Your regular return will list all the income earned or paid while you are domiciled in NJ, even if you were working or living somewhere else temporarily.  This includes wages, but also investment income, bank interest, and so on.  You will have to manually allocate each source of income in Turbotax.  You also report all your NJ withholding, and get a refund or owe additional tax depending on how the math works.

If you have no NJ-source income after changing your domicile, there will be no reason to even file an NR return.  You would only file this return if you have NJ-sourced income after changing your domicile.  This could include selling real estate (if you sold your house after the date you changed domiciles) or wages, if you were required to work in person for a short period.  Since you will have claimed all your NJ withholding on your regular return and gotten a refund if owed, any tax calculated on your NR return will have to be directly paid, since there is no withholding to offset it.

Since NJ does not have a convenience of the employer test for people living in South Dakota, you should be able to stop your NJ withholding once you move, but you will have to ask your employer. 

[rryanc25]

Thanks again! One more follow-up:

My employer fully supports my remote work status and agrees that I likely don't owe the State of NJ taxes given my status. However, their stance is that there is too many hoops to jump through to establish me as a resident of South Dakota, where they do no business.

I'm being told I can set my NJ income tax withhold to $0 through HR/payroll company. The W-2 would still list NJ wages in boxes 15 & 16. Would I still file a return to NJ?

[Opus 17 · Accepted solution]

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@rryanc25 wrote:

Thanks again! One more follow-up:

My employer fully supports my remote work status and agrees that I likely don't owe the State of NJ taxes given my status. However, their stance is that there is too many hoops to jump through to establish me as a resident of South Dakota, where they do no business.

I'm being told I can set my NJ income tax withhold to $0 through HR/payroll company. The W-2 would still list NJ wages in boxes 15 & 16. Would I still file a return to NJ?

---

Yes, if you have box 16 wages, New Jersey will want to match that to a tax return. 

As already discussed, for the year you move, you would file both a resident and a non-resident return, allocating your income accordingly.  If you moved October 1 for example, and your salary is $100,000, your resident return would allocate $75,000 to New Jersey, and your non-resident return would show the $25,000 of income but allocate zero to NJ (that way, NJ sees the full salary and also sees how you allocated it.). NJ may come back and ask for more details, of course.

For the next year when you are a NJ non-resident for the whole year, you would file an NJ non-resident return showing the box 16 wages and allocating zero percent to New Jersey, so no taxes would be owed.

Lastly, if your company uses a separate payroll processing company for your withholding and W-2, you should talk to them about your residency, they may be more flexible than your employer. 

[rryanc25]

Great, thank you.

That's very helpful.