In 2020, amid the COVID-19 pandemic, offices closed around the country, and employees were forced to work from home. Often employees, especially New York employees, are working from home in a different state. As tax season approaches, many employees may assume that since they are not actually working in New York, their income is not subject to New York tax. But unfortunately, that is not the case.
In 2006, New York adopted the “Convenience of the Employer” test for those employees working from home for a New York employer. Generally, New York imposes tax on a non-resident’s income that is New York source. New York source income for a non-resident of New York who works inside and outside of New York, includes only days worked in NY. However, any days worked outside of NY must only be those days worked for the necessity of the employer and not the convenience of the employee. Days worked at home in a state outside of the employee’s New York state office are New York source unless services are performed at a “bona fide place of business” of the employer.
The factors for determining an employer’s bona fide place of business outside of New York are very stringent. In order to qualify as a bona fide place of business outside of New York, employees must satisfy one primary factor or at least three secondary factors and four other factors. The primary factor is that the home office must have or be near special facilities not available at the place of business in New York. The secondary factors include:
The home office is a requirement of the employment
The employer has a bona fide purpose for the home office
The employee performs core duties of employment at the home office
The employee meets with clients, patients, or customers at the home office on a continuous basis
The employer does not provide the employee with designated office space at its regular place of business
The employer reimburses the employee for home office expenses
Other factors include:
The employer provides a separate telephone line for the home office
The home office address and phone number are on the business letterhead
The employee uses a specific area of the home for business separate from living area
The employee keeps inventory and business records at the home office
The home office has a sign, and advertising shows the home office as a place of business for the employer
The home office is covered by a business insurance policy
The employee is entitled to home office business deduction for federal income tax purposes
The employee is not an officer or director
Under these stringent requirements, it would be difficult to prove that New York employees forced to work from home due to the pandemic would qualify as having an employer bona fide office outside New York. Thus, wages earned while working from home during the pandemic are still taxable in New York. New York confirmed that the convenience of the employer still applies to the COVID working conditions by adding a FAQ on its website. The FAQ states that telecommuting during the pandemic whose primary office is in New York are considered days in New York unless the employer has established a bona fide employer office at the telecommuting location.
New York was one of the hardest-hit states during the pandemic, with many businesses shutting down for many months. This shut down caused sales tax revenue for New York to decrease drastically. Therefore, it is understandable that New York would not want to lose the personal income tax revenue from non-residents who normally worked in New York before the pandemic. A loss of this income could be catastrophic for hard-hit New York.
However, all states are struggling and are not in a position to give any tax revenue away this year. Most states allow their residents a credit for taxes paid to another state. This can be a costly loss to those states. New Jersey estimates that they allow as much as $1.2 billion in credits to New Jersey residents who work and pay taxes to New York. During this time of crisis, when tax revenue is essential, some states are challenging rules taxing their residents working in their state during the pandemic. In March, Massachusetts issued an emergency order requiring employees who usually worked in Massachusetts and who were working from home in another state due to the pandemic to continue to be taxed in Massachusetts on their income. New Hampshire opposed this order and is suing Massachusetts in the U.S. Supreme Court, claiming the order is unconstitutional. It is estimated that over one hundred thousand New Hampshire residents worked in Massachusetts before the pandemic but are now working at home in New Hampshire. New Hampshire Governor Chris Sununu stated that “Massachusetts cannot balance its budget on the backs of our citizens, punish our workers for making the decision to work from home and keep themselves and their families and those around them safe.” Fourteen states have signed amicus briefs backing New Hampshire, including New York’s neighboring states New Jersey and Connecticut. New York will most likely be keeping a close eye on this case as it could affect their taxing authority over non-residents working from home during the pandemic.
This year has been a stressful year for everyone, and we have had to adjust to changing work environments and lifestyles. Unfortunately, for employees of New York businesses, the taxing rules have remained the same, and even though you may be working from home in a different state, you still have to pay tax to New York.