@jporter2023 wrote:
Without the CPEO, it would be pretty clear that I need to file a NY non-resident state income tax return.
The CPEO-issued W-2 made me wonder if the convenience rule does not apply since it feels like my legal employer is actually the CPEO which is not a NY based company.
That said, after reading the definition of the convenience law, it looks like this whole issue is about whether or not the income was sourced from NY. It does not matter if the employer is not based in NY, in other words, the rule still applies because the income was sourced from the business in NY. Is this a correct interpretation?
I don't think you understood my answer.
"Without the CPEO, it would be pretty clear that I need to file a NY non-resident state income tax return."
This is not correct. If you were employed directly by the NY company, we have to consider the details of the convenience rule. Just because the rule exists does not mean it automatically applies to you.
For income tax purposes, in most states, the "source" of wage income is where you physically performed the work and not the location of the company headquarters. This relates to the concept of nexus, which I don't think I can explain very well although I can give another example. Generally speaking, a state can't charge sales tax on internet or mail order sales unless the business has a nexus with that state. Simply shipping product into a state by mail or cargo service is not enough to create a nexus. A nexus usually requires the presence of employees or other business activities. For example, I bought my first computer from a small company in California, I did not have to pay sales tax since I do not live in California. On the other hand, even though Amazon is also based in California, they have delivery drivers and warehouses in every state, that creates a nexus that forces them to charge sales tax on all their sales in those states.
(This is not a perfect example, because states are expanding the concept of nexus to try and claw as much sales tax out of internet sales as possible. But it's a good general rule and still applies to small businesses that don't have physical presence in other states.)
New York's convenience of the employer rule says that if you work out of state for the employer's reasons, your income is not considered New York-source, but if you work out of state for your own reasons, your income should be taxed in New York. That is, you can't skip dodge NY taxes by working from a low tax state like Vermont, and snowbirds who telecommute from Florida in the winter still owe NY tax.
However, there is a court ruling that even with the convenience of the employer rule, there must be a nexus between the employee and the state before the state can tax the employee's wages. That nexus is created by living or working in New York State for just one day (or more), but if you never set foot in New York, there is no nexus and your wages can't be treated as New York source.
That creates the following decision tree in your case.
1. Do you work for a New York employer?
if Yes or Maybe, go to #2.
if No, Stop. You don't owe NY income tax.
2. Did you physically work in New York for at least one day?
if Yes, go to #3.
if No, Stop. You don't owe NY income tax.
3. Do you work remotely for your own convenience or your employer's convenience?
Own convenience. You owe NY income tax on all the wages from the NY employer.
Employer's convenience. You only owe income tax on wages from the NY employer that were earned on the days you physically worked or lived in NY state.
I am admittedly confused by the implications of the CPEO. But no matter how we answer question 1, question 2 results in no NY tax owed because you never set foot in NY. You are not subject to the convenience of the employer rule.
