Section 601(e) of the New York State Tax Law imposes a personal income tax on a nonresident individual’s taxable income that is derived from New York sources. The tax is equal to the tax computed as if the individual were a New York State resident for the entire year, reduced by certain credits, multiplied by the income percentage.
Naturally, this law has been challenged. In Huckaby v. New York State Division of Tax Appeals (04- The New York Court of Appeals, the state’s highest court, upheld the decision. To be exempt from New York taxation, such wages must entail “duties … which by their very nature, cannot be performed at the employer’s place of business,” the court said.
While most states apply a “physical presence” test, New York applies a “convenience of the employer test.” In
other words, in New York the income must be earned by work performed out of New York State for the necessity of the employer, rather than out of convenience.
As you can imagine, there aren’t a lot of reasons why it’s necessary to work for a New York company outside of the state of New York.
One of the many problems with the Huckaby case is that it’s quite old. The Court of Appeals upheld the ruling in March 2005. Huckaby himself worked remotely from 1983 until 1991. This case has nothing to do with modern “telecommuting” trends and is clearly outdated. But it’s good for New York, so I don’t expect the state to change it anytime soon.
There’s also the possibility of double-taxation, since the state where you are a resident will still want its fair share too (if there is a state income tax). While there should be tax credits to mitigate the double-taxation, it obviously bears further research if this situation applies to you (or if you are planning on doing something like this in the future).
New York provides some guidance on how you can be exempted from paying nonresident taxes if you meet certain factors. Those possibilities are set forth in TSB-M-06(5)(I). They’re unlikely to apply to a lawyer that is working remotely for a New York firm.
Meanwhile, Congress has been trying to do something about the problem. The Multi-State Worker Tax Fairness Act aims to abolish the “convenience of the employer” test and force all states to rely on the “physical presence” of the employee. It most recently died in 2014 but apparently was reintroduced in 2016. According to the AmericanPayroll.org article, New York state opposed the legislation. That’s hardly surprising since they’ll see a loss in taxes.
It’d be good to see federal legislation enacted to straighten out this mess. Even if you live in a state where the double taxation problem is eliminated by credits, it doesn’t make any sense to force a taxpayer to file two separate returns.
so in short, you will have to file in the two states and thus need withholding for NY
California will give you some tax credit for the NY wages taxed in CA
