Did you know that some states have regulations requiring both residents and non-residents to pay state income taxes on all income earned from a company that’s located in that state even if the employee lives and works in a different state? Neither did I. Did you know that New York is one of those states along with Delaware, Pennsylvania, Nebraska and New Jersey?
I realize this will only apply to select group of readers, but I think it’s worth pointing out all the same: If you work remotely for a company based in New York, Delaware, Pennsylvania, Nebraska or New Jersey, even if you physically never step foot in those states, you may be subject to state income tax in those states.
The reason why I think this is such an interesting topic is the general trend to decentralize work. At my firm we have multiple associates that work remotely. One that I work with frequently is based in Florida. Her husband is a cardiologist, so she told the firm she planned on following him to Florida when he found a job there. The firm didn’t object and she’s been working remotely ever since.
As a Florida resident who never travels to New York, I always assumed that she didn’t pay New York state income taxes. And, since Florida doesn’t have a state income tax, I further assumed this to be a great deal for her as she effectively saves around 10% on state and city taxes while still being paid at the New York market rate.
This is every New Yorker’s dream. Get established in New York. Make New York money. Move to sunny Florida and successfully fend off New York’s inevitable challenge to your claimed change of domicile. Pay no state income taxes on your income. Is it too much to ask?
When I first heard about this, I assumed it couldn’t possibly be true. How does a state even have jurisdiction over a nonresident? The New York State Department of Taxation and Finance has a memo that is clear on the law.
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 (04-1734), 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).
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.
How did this work out for my colleague? Well, if you’ve been following the thread, the key part is New York sourced income. I wouldn’t be surprised if she’s employed by a different office of the firm (maybe the one that rhymes with Boshington TP), thus avoiding the problem. I didn’t want to ask.
Nonresidents Do Not Pay NYC city taxes
This is routinely misunderstood, so I thought I’d take a second at the end of the article to make sure it’s clear. If you are not a resident of NYC, you do not pay NYC taxes.
This wasn’t always the case. It was only in the early 2000s that New York City stopped taxing non-NYC residents for income earned in NYC, hence the reason why it’s still largely misunderstood (especially among NYC natives).
This means that if you live in New Jersey, Connecticut, Long Island or even Florida, the long arm of NYC won’t reach you there (above we’re just talking about state taxes).
Further Reading:
- Nicole Nelson Goluboff, Esq.’s presentation.
- New York Tax Treatment of Nonresidents, Applicable of Convenience of the Employer Test to Telecommuters and Others (TSB-M-06(5)I)
- Meredith Bentley, Hucaby v. New York State Demonstrates the Need for Legislative Action
Hat tip to MissBonnieMD who alerted me to this blatant money grab by the state of New York.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.
Interesting, I did not know that about the telecommuting tax penalty. And as for the NYC income tax. Part of me thinks it might be a good idea to move out to LI to avoid the income tax but LI as well most areas right outside of NYC have pretty high property taxes. Also, if you live farther away, it might increase your transportation costs as well so it might just be a wash.
It depends on income tax savings vs increase in property taxes. Since I rent, I looked into this at one point. Shaving the city tax off my annual tax bill is well worth the increase in transportation costs (which I can pay for with tax free money anyway). I think we just like living in the city too much for now.
Growing up my mom worked in Delaware and lived in Pennsylvania. The tax credit basically offset itself. However it still meant your left paying the higher state income tax. Delaware taxes overall were pretty low, but income taxes were higher to make up for super low real estate and no sales tax. In other words it cost more. I can imagine New York State tax is pretty high.
how about this? My husband works as a consultant, the company who hired and pays him is in NJ, we live in NJ, but the company my husband is consulting/working at is in NYC. Sometimes he works from home or wherever we happen to be on vacation (like Florida). Does he have to pay tax to NY on the days he works from home/vacation?
what about overseas telecommuting? why are they allowed to ripoff the USA from its jobs, taxes and obligations.. thousands of workers via telecommuting work on US NY based pcs, servers – preform consulting work and the like on machines located in the USA NYC area – even medical doctors now from some insurance companies … zero of them pay NYC income tax, state tax, federal tax, social security, unemployment, medicare or any other USA tax.
Hi! I just signed a one-year lease in NYC, but I work remotely for a CA company and is a resident of SD. Since I physically live in NYC, but my income is not derived from an NYC company, must I pay NYC taxes? Also, must I become an NYC resident if I live in NYC over 184 days?
Yes, New York City residents must pay NYC taxes regardless of the source of the income or where the services are performed.
https://www.osc.state.ny.us/agencies/pbull/agencies/2003_2004/495att1.pdf
Thank you.
Couldn’t she just go inactive with her New York bar membership? She would be unable to perform the services in New York. Save 10%.
I’m not sure her bar membership would make her ineligible for performing services in New York. If she’s deemed to be performing services in New York thanks to New York-sourced income, wouldn’t she just be in non-compliance with the New York bar assuming they saw it the same way? My guess is the New York bar wouldn’t follow similar logic as the taxing authorities.
When a company hires a remote employee, the company generally is required to register with that state to get the remote employee under his state’s unemployment insurance. Would the company be considered also doing business in the employee’s resident state even though the company has no other business activity besides having an employee there? If the company is considered doing business in the employee’s residence state, would this situation make the company no longer a New York based company?
Do you think this concept applies if the lawyer is working for a NY-based firm (with NY office on the W-2), even though the lawyer is working full-time at the Florida office of the firm? (i.e., not working remotely in a random location, but working at an entirely separate office the firm has established.)
I think it would come down to whether your income is derived from NY sources? Since the firm has a Florida office, it seems like your income would be derived from Florida sources, but it’s an interesting question. Has the state of New York claimed that you owe income tax?
Hi,
I’m a Florida resident since Dec 2018. Prior, I lived in Brooklyn for roughly 20 years…
Given the current coronavirus pandemic and schools closing down in NYC, I’m looking into working again with my former special needs agency in NYC, only this time it’s via teletherapy. NY State approved the virtual learning.
The company is need of therapists….Some are ill, etc.
I contacted the company and my former supervisor is delighted to have me back. As I complete my paperwork, the tax issue has surfaced. Should I be paying NY State and NY City taxes as a nonresident.
I need clarity about this matter since the circumstances are so unique with schools closed, teleservices in place, etc…Would this situation justify my employer needing my services out of “necessity.” And if so, can I avoid having to pay state and city taxes.
If taxes are not deducted, I don’t want to be hit with hug tax bill later.
Also, I’m signing up as an employee and not a independent contractor.
Your feedback will be greatly appreciated!
Thanks!
This is something you’ll probably need to ask a tax accountant about to be certain. My understanding is that you’ll have to pay NY State taxes, however you won’t have to pay NYC taxes. NYC repealed a law several years ago that required people to pay NYC taxes if they commuted into the city. Now you only pay NYC taxes if you live and work in NYC.
There is another issue, a huge one: I just talked to my NYCboss about it.
Your company, if they let you work remotely from another state, may be deemed to have a Presence in that state….and owe Corporate taxes on all their earnings to that state, even though you’re their only activity there. This even applies to freelancers.
The only way to get around this is Very Expensive and time consuming, and it involves the company registering with the remote state in some way.
So it’s a big big problem for the company. Suddenly they’re deemed to be in two states, and have to pay corporate taxes to both.
We currently live in NJ but are moving to New York state (Rockland County) If the hospital I work for is in NYC but I work remotely from our new home in Rockland County NY do I have to pay city tax?? While living in NJ that has been refunded to me. thank you
NYC income tax is only paid by people who live in NYC.
See: We Moved, Goodbye NYC
I think there is a critical misunderstanding about this particular tax rule and its application to remote workers. It was confusing for me until I spoke to a NY tax lawyer about it. So the general rule is that you would owe NY state taxes on income derived from NY based sources, even if you are working from outside NY. However, one of the exceptions to this rule is if you do 100% of your work remotely. In other words, if you were to actually work 100% of the time from Florida for example (and not come into NY at all for work) then you are exempt from NY state taxes. This exception is derived from a 1960s NY case called Hayes v State Tax Commission, which established that (1) the ‘convenience of the employer’ rule kicks in only if you have worked some part of the time in NY state and some part of the time from a remote (non-NY) location, and (2) if you do not ever perform any services in NY state for an entire calendar year then you are not subject to NY state taxes. Let’s say you work once a week from within NY and the rest of the days from outside NY. Then the days you work outside NY are considered as if you worked within NY, unless you can establish that you worked outside of NY due to some business reason and not just because it was convenient for you.
So the key here is this. If you are a remote employee working for a NY based company you just need to make sure that you are not performing any services within NY for any part of the year. Even if it’s only a day that you work within NY then you could be liable for NY state taxes on all your income for that year from that source. The next question someone might ask is how would NY state know whether you were actually working within the state or not for any part of the year. Well, if you get audited they would give you a financial colonoscopy to suss that out. So keep meticulous records.
I should have also mentioned that what I wrote above assumes that you have completely left New York and established residency in another state. If you still maintain NY state residency then the Hayes exception I mentioned may not apply, even if you work 100% of the time from outside NY.