Important Updates to Nebraska’s Convenience of the Employer Rule: Withholding for Remote Employees

On April 23, 2024, Governor Pillen signed into law LB 1023, which clarified and loosened Nebraska’s strict “Convenience of the Employer Rule.” The new law directly impacts Nebraska employers’ state income tax withholding obligations for remote employees.

As background, Nebraska is one of just a few states that imposes income tax on nonresident individuals in connection with income “derived from sources” within Nebraska (commonly referred to as the “Convenience of the Employer Rule”). As a result, Nebraska employers are obligated—except in limited circumstances—to withhold Nebraska state income taxes from their remote employees’ wages. In many situations, Nebraska employers are also required to withhold from their remote employees’ wages income taxes for the remote employee’s resident state, the amount of which varies by state and can impact an employee’s take-home pay. 

LB 1023 loosens Nebraska’s Convenience of the Employer Rule and creates a seven day bright-line physical presence measurement for tax-sourcing purposes. The bill also outlines specific items that do not constitute “presence” as well as a “safe harbor” for employers in meeting the requirements for withholding purposes.

The new rule becomes effective for taxable years beginning on or after January 1, 2025.  Accordingly, employers should continue complying with the current, strict Convenience of the Employer Rule for the 2024 tax year but may want to reconsider their remote employee withholding policies for next year.

Importantly, state income tax withholding is not the only issue employers should consider when hiring employees to work remotely from another state.  Additional considerations include: state employment leave laws, workers’ compensation insurance obligations, foreign registration, state business income taxes, and unemployment insurance obligations. Of course, each of these considerations may have a different outcome depending on the type of business entity of the employer.