MOST STATES IMPOSE INCOME TAX ON THE INCOME OF THEIR residents, regardless of where such income is earned. A handful of states, including Nebraska, also impose income tax on income that is derived from sources within the taxing state, regardless of where the employee performs their services (commonly referred to as the “Convenience of the Employer Rule”).1 When multiple states impose income tax on the same income, relief from “double taxation” is typically provided to individual taxpayers by their states of residency in the form of a tax credit. While individual taxpayers are eligible to receive such relief, their take-home pay can be negatively affected because employers— in some cases—must withhold state income taxes in both the employee’s resident state and the state to which the employee is directing their services. In the 2024 legislative session, the Nebraska Legislature amended its Convenience of the Employer Rule, loosening the sourcing rules for employees and bringing welcome relief to Nebraska-based employers (and their employees) in connection with their withholding obligations for remote workers. BACKGROUND ON NEBRASKA’S CONVENIENCE OF THE EMPLOYER RULE In addition to imposing tax on all income of Nebraska residents, the Nebraska Income Tax Act imposes tax on the income of every nonresident individual if such income is derived from sources within Nebraska. Specifically, if a nonresident employee’s services are performed outside of Nebraska for their convenience (i.e., such services are directly related to a business carried on in Nebraska and, except for the nonresident’s convenience, the services could have been performed in Nebraska), then compensation for such services is Nebraska-source income taxable in Nebraska.2 NATIONWIDE CHALLENGES AND ATTEMPTED SOLUTIONS TO CONVENIENCE OF THE EMPLOYER RULES While Nebraska’s Convenience of the Employer Rule has not been the direct subject of litigation, New York’s similar convenience of the employer rule has been subject to—and survived—constitutional challenge.3 Further, while the United States Supreme Court has had an opportunity to rule on state convenience of the employer rules, it has (so far) declined to do so. Specifically, in June 2021, the Supreme Court denied New Hampshire’s writ of certiorari to address the constitutionality of Massachusetts’ temporary income tax rules (due to COVID-19), which would have directly challenged Massachusetts’ convenience of the employer rule.4 There has also been interest on a federal legislative level to address these issues. Congress has introduced the following bills to limit state taxation of telecommuters: the Remote and Mobile Worker Relief Act of 2021 and the Multi-State Worker Tax Fairness Act of 2021, both of which would tie a state’s ability to tax nonresidents to their physical presence in such state. Neither such bill has made it out of committee. UPDATES TO NEBRASKA’S CONVENIENCE OF THE EMPLOYER RULE CONTINUED ON PAGE 16 BY HANNAH FISCHER FREY, MORGAN KREISER AND CARRIE SCHWAB, BAIRD HOLM LAW FIRM 15 nescpa.org
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