W2 Employee - Colorado Resident - New York Company

[CO-NY-Remote-Worker]

Hello,

I recently started a remote W2 position with a company based out of New York. As I have heard stories about NY and remote workers, I wanted to get a better understanding of my position. Would greatly appreciate any guidance.

Here are some key facts

1) I am a Colorado resident

2) The company I work for is based out of NY

3) I have never set foot in New York

4) I am a W2 Employee

5) I work 100% remote

[ToddL99]

Edited [03/24/2021 @ 10:49 AM PDT]

Unless the work you do can only be done in CO or your home office meets the test of being a "bona fide employer office", then you are subject to NY tax on your earnings.  (It does not make any difference if you have ever set foot in NY).

New York is a "convenience of the employer" state, which means they treat your teleworking income as "NY-sourced" income - just as if you were working in NY.   Put another way, if you are working in CO for the convenience of your NY employer, then your earnings are subject to NY tax.

There are exceptions to this rule - if your home office is considered a "bona fide employer office" and is located outside NYS, then your earnings are NOT considered as NY-source income. 

See pages 3-5 of  New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the... for "Factors to apply to determine if a home office is a bona fide employer office".

Absent an exception:

Because you are a CO resident, your NY earnings are also subject to CO tax.

You will have to file a NY non-resident tax return and pay NY tax on the earnings from your NY employer.

You will also file a CO resident tax return, paying tax on all your earnings (including those from NY). CO will give you a credit (against CO  tax) for any NY tax paid on the NY income - this is how states avoid "double-taxation".

To make this work correctly in TurboTax, you have to prepare the NY (non-resident return) first; that way the program knows haw much of a tax credit you will get from CO.

@Opus17  @TomD8

[Opus 17 · Accepted solution]

New York taxes remote workers if they work remotely for their own convenience.  New York does not tax remote workers if they work remotely for their employer's convenience.

For example, a graphic designer working for an NY firm is probably working remotely for their own convenience, since graphic design could easily be done if you lived in NY and the company has an office you could work at if you wanted to.  A repair technician or salesperson whose territory is in the West is working remotely for the employer's convenience since it puts you closer to your clients or customers.

Here's a quote from a law blog:

Naturally, this law has been challenged. In Huckaby v. New York State Division of Tax Appeals (04-1734), a New York state court found Thomas L. Huckaby liable for taxes on 100% of the wages he earned from a New York employer while working from his home in Tennessee, which has no state income tax. Although Huckaby, a computer programmer, worked approximately 25% in his employer’s New York office, he admitted he worked from home most of the time for personal reasons. 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. However, imagine working for a New York company that requires you to spend all of your time in Alaska working on an oil pipeline. In that scenario – or any scenario where your employer requires you to live outside of New York – you shouldn’t be subject to New York State income taxes. But if you’re living in Florida because it’s sunny and a great place to be a freelancer? That’s just convenient for you (and it turns out, convenient for New York too).

Here is an NY tax memo on the situation

https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf

Assuming you are subject to NY income tax, this is how you will file your return:

First, you file a NY non-resident return that reports your NY income only, and pays NY tax.

Second, you file a CO resident return that reports all your world-wide income, and computes and pays tax on the entire amount.  CO should give you a credit against NY taxes paid that will reduce any double taxation, but the net amount of tax you pay will basically be whatever state has the higher rate.  (For example, if the NY tax on your income is $3000 and the CO tax is $4000, CO should give you a $3000 credit, making your CO tax $1000 and your total tax $4000.  But if NY tax is $5000 and CO tax is $4000, the maximum CO credit will be $4000, making your total tax $5000.)

This also means that only your job for an NY company is NY income. Investment income, lottery prizes, and so on, are not NY income unless you were actually living in NY when they were paid.

In Turbotax, prepare the non-resident return first so the credit computes correctly.

CO's income tax rate is lower than NY, so I would have your employer withhold NY taxes only, since the NY taxes you pay will probably result in a credit that zeroes out your CO tax on the same income.  You would then only need to make quarterly estimated payments to cover your CO tax for non-NY income, if any. 

Or, if you are definitely working in CO for the employer's convenience, then you won't owe NY tax and just have CO tax withheld. 

[TomD8]

@Opus 17  @ToddL99 

I am not sure NY's "convenience of the employer rule" applies to non-residents who never set foot inside New York.

Note the following sentences/phrases from the New York tax memo previously referred to:  

"The memorandum addresses situations where a nonresident or part-year resident employee whose assigned or primary work location is in New York State performs services for an employer at that location and at a home office located outside of New York State."

Also:

If a nonresident employee . . . performs services for his employer both within and without New York State,..."

TSB-M-06(5)I:(5/06):New York Tax Treatment of Nonresidents and Part-Year Residents Application of th... :

And from New York Code Section 132.18 (a) regarding NY-sourcing of a non-resident's income:

 "If a nonresident employee (including corporate officers, but excluding employees provided for in section 132.17 of this Part) performs services for his employer both within and without New York State,..."

Section 132.18 - Earnings of nonresident employees and officers, N.Y. Comp. Codes R. & Regs. tit. 20...

Since the OP is a NY non-resident who never worked "within" New York, it seems that his remote income would not be subject to NY taxation.

Appreciate any comments!

[Opus 17]

---

@TomD8 wrote:

@Opus 17  @ToddL99 

I am not sure NY's "convenience of the employer rule" applies to non-residents who never set foot inside New York.

Appreciate any comments!

---

Possibly.  It appears the law impacts workers whose "primary office" is in New York.  Here, we can consider  at least 3 different fact patterns.

a. Employee has a regular office in NY but also works from home temporarily, even for long periods of time such as due to COVID.

b. Employee has an assigned office in NY but never actually works there.

c. Employee has no assigned office in NY and only ever works remotely.

Most of the online commentary I can find seems to address only condition (a).

NY Tax Law, § 632(b)(1)(B) says, in part, "Compensation for personal services rendered by a nonresident individual wholly without New York State is not included in his New York adjusted gross income, regardless of the fact that payment may be made from a point within New York State or that the employer is a resident individual, partnership or corporation.  Where the personal services are performed within and without New York State, the portion of the compensation attributable to the services performed within New York State must be determined in accordance with sections 132.16 through 132.18 of this Part." (emphasis added)

That seems to indicate that income from case (b) and case (c) is not NY income.

Section 132.18 is the section that says that if the taxpayer lives outside NY but works for an NY company, that is considered NY income, but as you point out, it begins with "If a nonresident employee (including corporate officers, but excluding employees provided for in section 132.17 of this Part) performs services for his employer both within and without New York State..."

This does not directly conflict with section 632 above.

NY's web site has this FAQ

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?

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.

Which, depending on the definition of a "primary office", could be stretched to include case (b), even though the law seems to say otherwise.  The FAQ also refers to memo 06-5 which sets out the conditions for an employer to establish a bona fide office in the employee's out-of-state home.  

So now, lets consider an expanded fact pattern (b1).

Employer hires employee to be a member of a particular division that is located in New York, and where the employer would provide an office if the employee moved, but the employee chooses to remain out of state and work remotely and the employer agrees.  The employer does not take sufficient steps to establish a bona fide office at the employee's home under memo 06-05.  The employee does not work in NY and has never previously lived in NY.  

The tax department FAQ for 2020 would seem to indicate this is NY income and the employee must file a non-resident tax return.  Section 632 would indicate the income is not taxable in NY.  So now the question becomes, if the taxpayer treats it as non-NY income and does not file an NY return, is the taxpayer willing to take it to court if NY audits them?

But, let's consider a slightly different fact pattern, (b2), the same as (b1) above, except that the employee is required to travel to NY 1 day a year to company headquarters, to meet in person with their team, be evaluated, and so on.  Even 1 day would defeat the "wholly without NY" clause in section 632, and now section 132.18 applies in full, and all the employee's income from the NY employer is NY taxable income on a non-resident return.

Or, suppose the employee moves to NY on December 30, same thing.  If they are a part-year resident, then section 132.18 comes into play.

Looks like a tricky situation.  Will the original poster here never be in NY on business? Not even for 1 day?

References

https://govt.westlaw.com/nycrr/Document/I50e80e3acd1711dda432a117e6e0f345?contextData=%28sc.Default%...

https://govt.westlaw.com/nycrr/Document/I50e80e10cd1711dda432a117e6e0f345?contextData=%28sc.Default%...

https://www.tax.ny.gov/pit/file/nonresident-faqs.htm#telecommuting

https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf

[TomD8]

@Opus 17 

There's also this:

“A nonresident who works in another State but who performs no work in New York is not subject to New York State tax liability no matter for whose convenience or necessity he performs the work.” 

Hayes v. State Tax Comm, 61 A.D.2d 62, 64 (N.Y. App. Div. 1978)

Hayes v. State Tax Comm, 61 A.D.2d 62 | Casetext Search + Citator

And the definition of NY-source income of a non-resident from NY Tax Bulletin IT-615 refers only to income from work carried out in New York.

https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/pit/ny_source_income_nonresident.htm

I suspect the "convenience of the employer" rule was originally intended to prevent a non-resident who normally works in (and is taxed by) New York from deciding on his own to work from his out-of-state home and then claiming that that portion of his income isn't taxable by New York.  I doubt it was intended to tax non-residents who do not, and never did, work in New York.  My opinion, of course, is totally and 100% unofficial.