A trap for the unwary - New York employers’ out of state remote workers may be liable for NY income tax.

As a global business hub, many overseas companies choose NYC as their landing point in the United States. It has the talent, professional services, networking opportunities and transport connections that make it a natural choice. New York may not, however, be the best fit for companies that expect to have a team of remote employees.

A not uncommon fact pattern that we see is the following: an overseas company forms a subsidiary in NY state as their entry point in the United States. They rent an office in a co-working space and hire an initial 2-3 employees to staff the operation - typically an admin/office manager and 1-2 sales/business development employees. The company doesn’t necessarily need to be in New York but chooses the state for the abovementioned reasons.

As time goes by, one of the company’s employees decides to move to Texas (or Florida, or Michigan etc.) and wants to continue working for the company remotely. As the employee is a valued worker, and their job can be done remotely, the company acquiesces, and the employee moves to (for example) Dallas.

Typically what happens in this situation is that the employer does little more to facilitate the move than change the employee’s location of employment to Texas using its payroll provider’s online dashboard (which recalculates the employee’s tax withholdings based on their new state of residence). Once the employee’s move is complete, the employee sees an increase in their take-home pay (as Texas has no income tax vs. the 5-6% that most NY workers pay), and has no inkling of their NY state tax liability. Life goes on until 12-18 months later when the employee receives a letter from the New York State Department of Taxation & Finance highlighting that the employee may have a New York income tax liability and may owe back taxes and penalties.

The situation has arised because both the employer and employee assumed that New York income tax only applies to workers who are based in New York. In fact, the law is clear that an employee of a New York company is liable for New York income tax unless their employment out of state is for the “convenience of the employer”. This means that if the New York company opens an office in Austin, TX and sends the employee to work there, then the employee won’t be liable for New York income tax. On the other hand, if the employee’s move to Texas is entirely at the employee’s own behest (and the employer has no office in Texas), then the employee’s move is not for the convenience of the employer, but rather for the employee’s convenience.

To help employers and employees determine whether an employee is subject to New York income tax (and the corresponding withholding) when working remotely out of state, the state has implemented the Convenience of the Employer test, the practical effect of which is to ensure that only employees who are working remotely because the employer requires them to, are exempt from New York state income tax. Below is an excerpt from the New York State Department of Taxation & Finance’s Office of Tax Policy Analysis Technical Services Division’s guide to New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others.

“Employees should use the factors provided below to assist them in determining if their home office constitutes a bona fide employer office. The factors are divided into three categories: the primary factor, secondary factors, and other factors. In order for an office to be considered a bona fide employer office, the office must meet either: a) the primary factor, or b) at least 4 of the secondary factors and 3 of the other factors.

Primary Factor

The home office contains or is near specialized facilities. If the employee’s duties require the use of special facilities that cannot be made available at the employer’s place of business, but those facilities are available at or near the employee’s home, then the home office will meet this factor. For example, if the employee’s duties require the use of a test track to test new cars, and a test track is not available at the employer’s offices in New York City, but is available near the employee’s home, then the home office will meet this factor. In the alternative, if the employee’s duties require the use of specialized scientific equipment that is set up at the employee’s home (or at a facility near the employee’s home) but could physically be set up at the employer’s place of business located in New York, then the home office would not meet this factor.

Secondary Factors.

1) The home office is a requirement or condition of employment. If the employer requires the employee to work from his or her home office as a condition of employment, the home office will meet this factor. For example, if a written employment contract states the employee must work from home to perform specific duties for the employer, then the home office will meet this factor.

2) The employer has a bona fide business purpose for the employee’s home office location. If the employer has a bona fide business purpose for establishing an office in the locale where the employee’s home is located, the home office will meet this factor. For example, if the employee is an engineer working on several projects in his or her home state and it is necessary that the employee have an office near these projects in order to meet project deadlines, then the home office will meet this factor.

3) The employee performs some of the core duties of his or her employment at the home office. If some of the core duties of employment are performed at the home office, then the home office will meet this factor. For example, the core duties of a stock broker include the purchase and sale of stock. Accordingly, if the stock broker executes stock purchases and sales from the home office, this would constitute performing some of the core duties at the home office. However, if the stock broker merely reads business publications on the weekend, this would not constitute performing any core duties 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. If an important part of the employee’s duties include physically meeting with clients, patients or customers in the normal course of the employer’s trade or business, and those meetings are performed on a regular and continuous basis at the home office, then the home office will meet this factor. For example, the employer has clients located near the employee’s home office and the employee must meet with the clients once a week to perform the duties of his or her job. If the meetings with clients are on a regular and continuous basis at the employee’s home office, then the home office will meet this factor.

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. If the employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business, then the home office will meet this factor. For example, an employer wishes to reduce the size of the office space maintained in New York to decrease rental expenses and, therefore, no longer provides designated office space or other regular work accommodations for one of its employees. Instead, the employer allows the employee to work from the employee’s home. If the employee must come to the office, the employee must use the “visitors” cubicle, conference room, or other available space that is also used by the other employees of the company. In this instance, the home office will meet this factor.

6) Employer reimbursement of expenses for the home office. If the employer reimburses the employee for substantially all of the expenses (e.g., utility expenses, insurance) related to the home office, or the employer pays the employee a fair rental value for the home office space used and the employer furnishes or reimburses the employee for substantially all of the supplies and equipment used by the employee, then the home office will meet this factor. For purposes of this factor, substantially all of the expenses means 80% or more of the expenses.

Other factors

1) The employer maintains a separate telephone line and listing for the home office.

2) The employee’s home office address and phone number is listed on the business letterhead and/or business cards of the employer.

3) 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. T

4) 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.

5) Business records of the employer are stored at the employee’s home office.

6) The home office location has a sign indicating a place of business of the employer.

7) Advertising for the employer shows the employee’s home office as one of the employer’s places of business.

8) The home office is covered by a business insurance policy or by a business rider to the employee’s homeowner insurance policy.

9) The employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes.

10) The employee is not an officer of the company.

As can be seen, the test is tailored to ensure that employees who request to work remotely are subject to New York income tax. Moreover, due to the relative ease of identifying who these individuals are, the state has not been shy about issuing audit letters.

Ultimately few employees requesting remote work would be deterred by the requirement to pay New York income tax provided they know about it in advance (and not by way of an audit letter 18 months after the arrangement commences), demonstrating the importance of researching any employee/employer state tax liabilities prior to commencing a new arrangement.