Normally, working in New York City means that income tax will be due to New York State. This is true irrespective of whether the worker travels to the NYC job from the worker’s home within New York State or from home in New Jersey or Connecticut. New York State income tax is based on working at the job inside New York, even if one commutes to that job from one’s home outside New York State. If you live in NYC, you also incur NYC income tax.
But, what if you haven’t commuted to your job in NYC for many months because of the COVID-19 pandemic? What if your NYC office or employer has been closed and you’ve been working from home? What if you haven’t even set foot in NY State during the pandemic? What if your employer remains in NYC, but you’ve moved to Florida and work from home? Will you still have to pay income tax to NYS?
The answer is: Yes. You will still pay NYS tax if your employer is in NYS and you’ve been working from home, whether home is in New York or New Jersey or another state.
New York’s “Convenience of the Employer” Rule
The position of the New York State Department of Taxation is that for nonresidents whose primary office is in New York State, any days “telecommuting” during the pandemic are treated as days worked in the state unless the taxpayer’s employer has established a “bona fide employer office” at the telecommuting location. New York State has thus refused to adjust its state tax liability rules to account for the changing dynamic of working from home or “telecommuting” due to the COVID-19 pandemic.
In October 2020, the Department addressed the issue of nonresident withholding requirements for COVID-19 telecommuting. The guidance, posted on the Frequently Asked Question page of the Department’s website, provided that the same test established in 2006, the “Convenience of the Employer Test,” will apply in determining whether a taxpayer is subject to New York State income taxes when he or she is “telecommuting” due to COVID-19.
Because the Department’s recent guidance offers no special rules or exceptions relating to the COVID-19 pandemic, employees working from home because of COVID-19 will generally still be required to pay New York State taxes on income earned from a New York State employer, even if working from home outside of New York State. (Note, it is possible for the “bona fide employer office” requirement to be established. For example, 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).
It is important to note that for purposes of New York State income tax, an employee’s home office is not the same as a “bona fide employer office.” Therefore, New York employers should continue to withhold New York State income taxes for their nonresident employees working from home, and such employees should expect to be subject to New York state income taxes.
NYC Income Tax is Based on NYC Residence
With regard to local income taxes, telecommuting has no effect on whether or not a taxpayer is subject to New York City Personal Income Tax (NYCPIT). This is because NYCPIT focuses strictly on residency, rather than the city or state in which the income was earned. Only NYC residents are subject to the New York City Personal Income Tax; nonresidents of NYC are not liable for NYCPIT (with one exception: employees of New York City Government agencies are subject to the NYCPIT regardless of their residency). Therefore, working from home due to the pandemic will not change a taxpayer’s NYC tax liability for purposes of the NYCPIT.
What if a taxpayer is a New York City resident but has lived and worked in her house in the Hamptons since the pandemic began? The answer depends on whether or not the taxpayer intended to change her residence, and there are different indicia of intent that will be examined in an audit. For instance, if the taxpayer kept her NYC apartment while living and working in the Hamptons, NYC income tax would likely still be due.
The following chart explains the tax implications for working from home:
The Tax Battles Between States Over Working From Home During Covid
The State of New Hampshire recently filed a lawsuit against its neighboring state of Massachusetts over a tax issue that has arisen from working from home during the COVID-19 pandemic.
Prior to the pandemic, residents of New Hampshire who worked for Massachusetts employers paid income tax to Massachusetts based on the number of days the New Hampshire residents worked within Massachusetts. If the New Hampshire residents worked from home, then Massachusetts would not tax income earned when working from home. If the New Hampshire resident worked from home one day each week, that would be a 20% reduction to the tax owed to Massachusetts.
But what if, as a result of the pandemic, the New Hampshire resident now works from home five days a week? Early into the pandemic, Massachusetts enacted a rule that froze the classification of income as sourced in Massachusetts, without regard to the new pandemic realities of working from home. As a result of the rule, the New Hampshire resident would only be allowed to deduct the same 20% as before the pandemic. Similar to New Jersey residents working from home and not setting foot in New York, New Hampshire residents are paying tax to Massachusetts when they no longer commute to work in Massachusetts.
New Hampshire has now sued Massachusetts over this issue, and the case will be heard by the United States Supreme Court. In one interesting argument, Massachusetts argues that the state of New Hampshire itself should not be allowed to sue as plaintiff, because any alleged harm is not to the state itself, but rather to the citizens of New Hampshire. Massachusetts also argues that it has always taxed non-residents on their Massachusetts-sourced income, and continues to do so, just as other states tax Massachusetts residents on income derived in those other states. This is the same reason why New York State taxes New Jersey and Connecticut residents on their income earned in New York State.
It is also interesting to note that New Hampshire, like Florida, Texas, and Nevada, does not have a personal income tax (but New Hampshire does tax investment income), which means that if New Hampshire wins the lawsuit, it would appear that its residents would not be taxed by either Massachusetts or New Hampshire on their “work from home” income.
The lawsuit between New Hampshire and Massachusetts is now before the United States Supreme Court. New Jersey and Connecticut, among other states, have filed briefs in support of New Hampshire’s position. The ultimate decision in this case will also affect whether New York can continue to reach beyond its borders to tax residents of other states who are working from home.
The COVID-19 pandemic has transformed the working world, as legions of people have been working from home and will continue to do so. In addition, multitudes of people have left New York City but remain tied to their NYC employers — meaning that they will continue to be taxed by New York State despite their relocation. Our tax and employment lawyers at Gallet Dreyer & Berkey, LLP continue to monitor the changing working dynamics and the resulting tax consequences and would be pleased to advise you.