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.

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.

This bill provides welcome relief to Nebraska employers who have been grappling with the Convenience of the Employer Rule’s broad application, particularly in light of the increase in popularity of remote work since the COVID-19 pandemic. Not only does this impact an employer’s withholding obligation, but it encourages businesses to make Nebraska their home. Practitioners should become familiar with both the historical and current application of Nebraska’s Convenience of the Employer Rule, as well as how it interacts with other states’ laws, to ensure their employer clients withhold properly.