In The Empire State Strikes Back, we explored the potential tax pitfall of relocating to another state during the pandemic. There is another common scenario that could impact your tax bill—telecommuting.
New York’s strict rules regarding telecommuting are nothing new. In general, if your primary office is located there, you must pay New York taxes on wages earned while telecommuting from your home state. That said, the pandemic raised many questions about the taxation of forced telecommuting. Specifically, would employees forced to work remotely be exempt from these rules?
This question lingered for almost seven months before New York quietly updated their nonresident FAQ page in October with this specific question and answer:1
|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.
There are a number of factors that determine whether your employer has established a bona fide employer office at your telecommuting location. In general, unless your employer specifically acted to establish a bona fide employer office at your telecommuting location, you will continue to owe New York State income tax on income earned while telecommuting.
How Do You Know If Your Location Qualifies?
According to the state’s response, you don’t have to pay New York taxes on your wages if your telecommuting location is a “bona fide employer office.” But what does that mean? Like many tax issues, it boils down to facts and circumstances and your ability to prove you have met the state’s requirements.
To qualify as a “bona fide employer office,” your office must satisfy one of the following tests:2
Primary Factor Test
- Your home office contains or is near specialized facilities necessary to perform your work and not available through your employer’s New York office.
- In this situation, your remote office is deemed a “bona fide employer office.”
Secondary Factor Test
- You satisfy the first part of this test if you can answer “yes” to at least four of the following questions:
- Is your home office a condition of employment?
- Do you perform projects in your home state that require a nearby office?
- Do you perform your core duties at your home office?
- Do you regularly meet with clients at or near your home office?
- Is there no designated workspace in the New York location for your use?
- Does your employer reimburse you for at least 80% of your home office expenses?
- For the second part of the test, you must answer “yes” to at least three of these questions:
- Does your employer maintain a separate phone line and listing for your home office?
- Is your home office listed on business letterhead and business cards?
- Do you have a designated workspace in your home that is separate from your living area and used exclusively for the business of your employer?
- Do you keep inventory in your home office?
- Do you keep business records in your home office?
- Does your home office location have a sign indicating it is a place of business for your employer?
- Does your employer advertise your home office as a place of business?
- Is your home office covered by a business insurance policy or business rider to your homeowners policy?
- Are you eligible to (and do you) deduct home office expenses on your federal tax return (for tax years prior to 2018 and after 2025)?
- Are you a “rank and file” employee of the business (not an officer)?
- In general, an office that satisfies both parts of this test may be considered a “bona fide employer office” for tax purposes.
What’s the Bottom Line?
New York has made it very clear that all the wages you earn while telecommuting during the pandemic will be subject to New York taxes unless you meet one of the above tests. It will not matter whether you’re required, either by state mandate or your employer, to work from home.
We’re Here to Help
Our tax professionals are uniquely positioned to help you navigate New York’s complex telecommuting tax rules. Many of the them work in our New York offices and now, like you, find themselves working remotely because of the pandemic. So, when we say we understand the challenges you face, we truly do. Contact us to speak with an advisor about your situation.
2 Excerpted directly from New York State Department of Taxation and Finance Memorandum, TSB-M-06(5)I, May 15, 2006, https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf