New York Convenience of Employer Rule

[jporter2023]

My employer is based in New York. The employer hires a California based CPEO to handle payroll, taxes and benefits. I received a W-2 from the CPEO rather than my employer. I am a Colorado resident who works remotely. I’ve never set foot in New York for work.

I understand there is a convenience of employer rule in New York. It means that a non-New York resident who works for a New York based employer is responsible for New York state income tax.

My question: am I still subject to this rule when the employer that issued the W-2 is in fact a California based CPEO? To me, the CPEO seems to be my employer for tax purposes.

[Critter-3]

Your employer is in CA  not NY  so the NY rules have nothing to do with you.

[Opus 17]

It's not clear to me if you are a legal employee of the NY company, or if you are an employee of the CPEO and your services are contacted through the CPEO for the NY business.  Is your contract with the NY business or the CPEO?  

If you are a legal employee of the CPEO, the convenience of the employer rule does not apply.  If you are an employee of the NY business, read on.  (However, if you physically worked in NY state for any period of time, such as training or orientation, that is going to be considered NY-source income and you will file a non-resident NY return.  This is part 3 below.)

Generally, you owe a resident income tax return to the state of your permanent residence, reporting and paying tax on all your world-wide income.  In addition, you may owe a non-resident tax return if you have income that is considered "sourced" to another state.  Most of the time, source is determined by where you physically lived or physically performed the work, regardless of where the company has its offices.  But New York is one of 7 states that has the convenience of the employer rule.

Part 1:

The convenience of the employer rule does not apply if you never set foot in NY during the tax year.  If that is true, you need only need to file a non-resident NY return if you had NY tax withholding.  You would report zero NY-source income, zero tax owed, and claim a full refund of the withholding.  You will file a Colorado return that reports all your world-wide income, and pays Colorado tax. Hopefully you had Colorado withholding.

If you physically worked inside New York for even one work day (such as orientation, meetings, training, etc.) then the convenience of the employer rule applies.  The next step is determine if you worked in Colorado for your own convenience or for the convenience of the employer.  You are working remotely for your own convenience if the company has an office for you and you could work there but choose not to.  You are working remotely for the employer's convenience if they want to you work remotely (maybe you have duties that require you to be present in Colorado, or maybe they closed their NY offices and don't have room for you.)

Part 2:

If you are working remotely for your own convenience, you must file a NY non-resident return that reports your NY-source income and pays NY tax.  You will file a Colorado resident return that reports all your worldwide income and pays Colorado tax; Colorado will give you a credit for tax you paid to New York.

Part 3:

If you are working remotely for your employers convenience, then your income is only considered NY-source for the days you physically lived or worked in NY, such as for training or meetings.  Suppose you started the job on July 1 and had one week of training NY, then 1/26 of your wages would be NY-source (3.85%).  You 

you file a NY non-resident return that reports your NY-source income and pays NY tax.  You will file a Colorado resident return that reports all your worldwide income and pays Colorado tax; Colorado will give you a credit for tax you paid to New York.

Lastly note that if you file a Colorado resident and an NY non-resident return, you must manually allocate your income to NY, Turbotax won't know how to do it for you.  Interest, capital gains, prizes, and other income is sourced to where your permanent home was located when it was paid.  Your only income that should be allocated to NY is part or all of your NY job income, depending on the circumstances. 

[jporter2023]

The employment offer came from the NY company. Payroll, tax withholding, benefits are all handled by the CPEO based in California. I was surprised to see that the W-2 was issued by the CPEO rather than my employer.

The CPEO withheld Colorado state income tax not NY.

The NY employer has offices in NY, but like many other employees I have never set foot in NY for work and training. Everything was done remotely. The NY employer has verbally committed to maintaining the remote work arrangement indefinitely.

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?

[Opus 17]

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@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?

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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.  

[jporter2023]

I appreciate your responses, but I am not certain if I fully agree with point #2 in your decision tree. According to the language from the New York State Department of Taxation and Finance –

If a nonresident employee . . . performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number of working days employed both within and without New York State. . . . However, any allowance claimed for days worked outside New York State must be based upon the performance of services which of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.

In my case, the total number of working days employed within New York State is zero. However, it goes on to state that any allowance claimed for days worked outside New York State must pass the convenience rule test. The employer has asked employees to work from home, which could be seen as a perk (convenience), but it could also be argued that it is done to cut down on rental costs and therefore, deemed as a necessity. From what I read, New York State does not follow the physical presence rule, which taxes workers based on income earned in the state only if they are physically present on that work day.

Additionally, during the pandemic, the Department issued an FAQ stating that if a nonresident's primary office is in New York State, their days spent telecommuting during the pandemic are considered days worked in the state.