NEBRASKA WITHHOLDING REQUIREMENTS Although the Nebraska Convenience of the Employer Rule is an income-sourcing rule imposed on the individual taxpayer, employers must also be cognizant of its application due to the close connection between income-sourcing rules and withholding rules. Nebraska law generally requires an employer to withhold from wages an amount equal to the tax “reasonably estimated to be due,” arguably incorporating the Convenience of the Employer Rule.5 With that said, Nebraska Regulation 21-006.01 provides an exception to withholding for a nonresident employee who performs no work while physically in Nebraska, thus providing limited relief for employers who can confirm their employee did not perform any services while physically in Nebraska in the year. Except in limited circumstances, the obligation to withhold Nebraska income tax would not impact a Nebraska employer’s obligation to also withhold in its remote employee’s resident state, which could leave the employer in a position of double withholding if an employee’s resident state requires withholding on the full wages of its residents. While most states provide a credit against an employee’s resident state tax for Nebraska income tax paid, the withholding statutes of the various states do not always call for such credit to be taken into account when calculating withholding. In such a situation, double withholding could substantially reduce the affected employees’ take-home pay, which could cause employee friction and pose challenges to communicating the withholding rules (while remaining tax neutral as an employer). NEW NEBRASKA LEGISLATION CLARIFYING CONVENIENCE RULE On April 23, 2024, Governor Pillen signed into law LB1023, which, among other things, amends Nebraska’s Convenience of the Employer Rule to provide certain exceptions to income sourcing (and thereby extending to an employer’s Nebraska withholding obligations). The revised rule provides that compensation paid constitutes income derived from sources within Nebraska if, among other things:6 The individual is a nonresident and the individual’s service is performed without this state for his or her convenience, but the service is directly related to a business, trade, or profession carried on within this state and, except for the individual’s convenience, the service could have been performed within this state, provided that such individual must be present, in connection with such business, trade, or profession, within this state for more than seven days during the taxable year in which the compensation is earned. In other words, the new law creates a minimum seven-day physical presence requirement before such individual’s income is considered Nebraska-source income. For this purpose, an individual is considered “present” in Nebraska for a day if the individual performs “employment duties” in Nebraska. “Employment duty days” are specifically defined and certain exceptions exist for, among other things, (a) days “in transit”; (b) days spent at a “conference” or “training,” if certain requirements are met; and (c) time spent serving on a board of directors or similar governing body. Recent guidance from the Nebraska Department of Revenue clarifies that the exception for “conference” and “training” days does not apply if the seven-day physical presence requirement is otherwise met; i.e., if an employee attends five days of “training” in Nebraska and works 10 “employment duty days” in the state, the employer must withhold Nebraska state income taxes on the employee’s wages for all days in which they are physically present in Nebraska.7 Finally, the revised rule includes a safe harbor for employers, which provides that the Nebraska Department of Revenue will not impose penalties or interest for an employer’s failure to deduct and withhold income taxes if, when determining whether withholding was required, the employer either (a) maintains a “time and attendance system” that allocates employee wages among taxing jurisdictions; or (b) if no such system exists, the employer relies on (i) its own records regarding the individual’s location, (ii) the individual’s own allocation of time spent in the state, barring any actual knowledge of fraud or tax evasion, (iii) travel records, (iv) travel expense reimbursement records, or (v) a written statement from the individual attesting to the number of days spent performing services in the state. The Nebraska Form 9N, Nebraska Nonresident Employee Certificate, may assist employers and employees in meeting this safe harbor. As of the date of publication, at the request of Governor Jim Pillen, State Senator R. Brad von Gillern introduced legislation (LB650) to further revise Nebraska’s Convenience of the Employer Rule by removing the seven-day minimum physical presence requirement. LB650 was referred to the Revenue Committee for further consideration. CONTINUED FROM PAGE 16 16 Nebraska CPA
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