Convenience of the Employer Rules

Why New York’s Convenience of the Employer Rule May Put a Damper on Your Plan to Work Remotely, and Avoid New York State Income Tax

Thanks to the rise in remote work since the start of the COVID-19 pandemic, many people who previously commuted to work in New York are now taking advantage of the ability to work from home. In many of these cases, New York State residents have moved to states with a lower cost of living, including Florida, Vermont, and South Carolina.

While most states outside New York have lower, or in the cases of Florida and Nevada, no state income taxes, many employees make the move without knowing that they still may have to pay state income tax to New York.

That’s because New York is one of a handful of states that use something called the convenience of the employer rule to determine whether an out of state employee is subject to New York income tax

Defining the Convenience of the Employer Rule

New York ignores the physical presence rule that most other states employ. Under this rule a worker is taxed on income earned in the state, only if they are physically present in the state on that work day.

Under the convenience of the employer rule employees who work for a business in one state, but remotely perform their work in another state, are subject to tax on their wages in the state in which their employer’s office is situated.

New York will consider a number of factors in determining whether an out of state worker is liable for New York State income tax. Remember, the burden is on the taxpayer to prove that they meet one of two exceptions to the rule.

Exceptions to the Convenience of the Employer Rule

1. Convenience Test
Employees who are relocated to another state at the employer’s direction, will meet an exception to the rule. The understanding behind this exception is that the employer relocated the employee because the work could only be performed remotely. For example, if a New York healthcare worker is assigned to a hospital in Pennsylvania, any work performed in the new hospital would not be subject to New York State income tax.

2. Bona Find Employer Office

An employee’s home office will satisfy this test if it meets either the primary factor, or four out of six secondary factors and three out of ten other factors.

The primary factor is the home office has, or is located near specialized facilities, and such work cannot be performed at the employer’s place of business. For example, if the employee’s duties are to test out medical grade equipment at manufacturing facilities nearby the employee’s home, their home would meet the bona fide employer office test.

The alternative to meeting the primary factor above is to meet four out of the six secondary factors and three out of ten other factors below.

Secondary Factors

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 their employment at the home office
4. The employee meets or deals with clients or customers on a regular and continuous basis at the home office
5. The employer does not provide the employee with a designated office space at one if its regular places of business
6. Employer reimbursement of home office expenses

Other Factors

1. The employer maintains a separate phone line for the home office
2. The employee’s home office and phone number is listed on the business letterhead or business cards of the employer
3. The employee uses a specific area of the home exclusively for business purposes that is separate from the living areas.
4. The employer’s business is wholesale and the employee stores inventory at their home
5. The employee stores business records and documents in their home office
6. The home office location has a sign to indicate it’s a place of business for the employer
7. The employer advertises the employee’s home office as a place of business
8. The home office is either covered by a business insurance policy or by a business rider to the employee’s homeowner insurance policy
9. The employee is both entitled to and claims a home office deduction
10. The employee is not an officer of the company.

If you’re considering an out of state move, you may want to consider if your planned employment situation affects your obligation to pay New York State tax. If you’re looking to move out of state and you’re planning to work remotely for your employer, it is important that you talk to them in advance, to see if there are ways to meet any of the allowable exceptions.

Article by Jarrod Galassi, Senior Tax Manager