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October 27th, 2020
Do Telecommuters Working in Another State Owe New York State Income Taxes?
New York State recently issued new tax guidance for telecommuters providing answers to questions about the impact of COVID-19 on their New York State and New York City personal income tax liability. Among other things, the FAQs specifically address the example of a nonresident who has a primary office in New York but is telecommuting from outside New York:
“Q: My primary office is inside New York State, but I am telecommuting from outside of the state due to the COVID-19 pandemic. Do I owe New York taxes on the income I earn while telecommuting?
A: If you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location. There are a number of factors that determine whether your employer has established a bona fide employer office at your telecommuting location. In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York State income tax on income earned while telecommuting.”
Analysis. In this Q&A, the New York State Tax Department has taken a position consistent with its longstanding “convenience of the employer” rule. Under this rule, a nonresident employee who performs services for his or her employer both inside and outside New York is allowed to apportion some of his or her income from such services outside New York only if the performance of such services, “of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his [or her] employer.”
Factors that determine whether a home office is a “bona fide employer office.” In a 2006 Technical Services Bureau Memorandum, the New York State Tax Department discussed the “convenience of the employer” rule and indicated that a normal work day spent by an employee at his or her home office outside New York will be treated as a day worked outside New York if the employee’s home office is a bona fide employer office. The TSB Memorandum described the factors that determine whether an employee’s home office constitutes a bona fide employer office and stated that a bona fide employer office must meet either (a) the specified “primary factor,” or (b) at least four of the prescribed “secondary factors” and three of the listed “other factors.”
The “primary factor” is whether the home office contains or is near specialized facilities.
The “secondary factors” are whether:
(1) the home office is a requirement or condition of employment;
(2) the employer has a bona fide business purpose for the employee’s home office location;
(3) the employee performs some of the core duties of his or her employment at the home office;
(4) the employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office;
(5) the employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business; and
(6) the employer reimburses expenses for the home office.
The “other factors” are:
(i) the employer maintains a separate telephone line and listing for the home office;
(ii) the employee’s home office address and phone number are listed on the business letterhead and/or business cards of the employer;
(iii) the employee uses a specific area of the home exclusively to conduct the business of the employer that is separate from the living area (The home office will not meet this factor if the area is used for both business and personal purposes.);
(iv) the employer’s business is selling products at wholesale or retail and the employee keeps an inventory of the products or product samples in the home office for use in the employer’s business;
(v) business records of the employer are stored at the employee’s home office;
(vi) the home office location has a sign indicating a place of business of the employer;
(vii) advertising for the employer shows the employee’s home office as one of the employer’s places of business;
(viii) the home office is covered by a business insurance policy or by a business rider to the employee’s homeowner insurance policy;
(ix) the employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes; and
(x) the employee is not an officer of the employer.
Conclusion. Establishing that an employee’s home office is a bona fide employer office is not easy to do under the test set forth above. As a result, most employees whose primary office is in New York but have been working outside New York during the pandemic will likely continue to be taxable in New York with respect to the compensation received from their New York employers.
If you have questions about this recent New York State tax guidance, or other questions about tax law matters, please contact Jeffrey Marks at (212) 826-5536 or firstname.lastname@example.org, or any other member of the Frankfurt Kurnit Tax Group.