Throughout the COVID-19 pandemic, many employees have worked from home. This could subject taxpayers who work in one state but live in another to personal income taxes in multiple states, more so now than ever before. This is particularly true for employees who work in New York but live in another state during the pandemic.
In light of recent guidance from the New York State Department of Taxation and Finance (New York Department), below we discuss the current status of filing requirements for employees who are assigned to work in New York but work remotely in New Jersey or Connecticut. However, ongoing litigation may change the current landscape.
Background
Specifically, the applicable regulation states that "any allowance claimed [by nonresidents of New York] 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 services of his employer." In other words, while tax is generally allocated to New York State based on the number of days physically worked in the state, the convenience rule acts as an exception to the general rule of allocation based on physical location.
Allocation under the convenience rule during the pandemic
The State of New York closed nonessential businesses for much of 2020, beginning in mid-March 2020, due to the COVID-19 pandemic, leading to significant uncertainty around whether employees working from home due to government mandates would be taxed under the convenience rule. Many assumed that these employees worked remotely out of necessity, as distinguished from convenience, thereby rendering the convenience rule inapplicable. However, in an October 2020 update on its website, the New York Department stated that "if you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in [New York] unless your employer has established a bona fide employer office at your telecommuting location."
The "bona fide employer office" exception is narrow, meaning that most work-from-home employment still would be treated as New York-sourced income. Pursuant to New York Department memorandum TSB-M-06(5)I, for tax years beginning in 2006, a day of work spent at a home office is treated as a day worked outside of New York "if the taxpayer’s home office is a bona fide employer office." To be considered "bona fide," an employer office must satisfy either (1) a primary factor or (2) at least four secondary and three other factors. The primary factor is that the "home office contains or is near specialized facilities." Secondary factors are the following: (1) the home office is a condition of employment, (2) the employer has a bona fide purpose for the home office location, (3) the employee performs core duties from the home office, (4) the employee meets or deals with clients regularly at the home office, (5) the employer does not provide the employee with a designated office space at its regular places of business and (6) the employer provides reimbursement of substantially all expenses for the home office. Other factors are (1) the employer maintains a separate telephone line for the home office, (2) the home office address is listed on business letterhead, (3) the employee uses a specific area of the home exclusively for the business, (4) the employee keeps inventory of products or samples at the home office, (5) business records are stored at the home office, (6) the home office has a sign indicating that it is a place of business, (7) advertising for the employer lists the home office, (8) the home office is covered by business insurance, (9) the employee is entitled to home office expense deductions and (10) the employee is not an officer of the company.
Based on these relevant factors, it would seem that very few work-from-home arrangements related to the COVID-19 pandemic would qualify as a bona fide employer office. This means that the New York Department is likely to allocate to New York the taxes attributable to most work-from-home days for employees who are assigned to work in New York but work remotely outside of the state due to the pandemic.
In sum, most taxpayers who are assigned to work in New York but are working from home outside of New York may still need to allocate income tax for work-from-home days to New York in order to comply with the current guidance issued by New York.
Double taxation relief for New Jersey residents assigned to work in New York
By contrast, New Jersey appears to provide relief for taxpayers who are residents of New Jersey and working from home while assigned to work in New York. Generally, N.J.S.A. 54A:4-1(a) provides New Jersey resident taxpayers with a "credit against tax otherwise due ... for the amount of any income tax or wage tax imposed for the taxable year by another state of the United States or political subdivision of such state," for income also subject to tax under the Gross Income Tax Act.
In response to the COVID-19 pandemic, New Jersey issued specific guidance granting relief regarding the income [?] sourcing of New Jersey residents who telecommute. Specifically, the New Jersey Division of Taxation (New Jersey Division) website states that, while New Jersey’s "sourcing rules dictate that income is sourced based on where the services or employment is performed based on a day’s method of allocation," during the COVID-19 pandemic, "wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction."
In sum, the New Jersey Division’s guidance follows the sourcing rules of the employer’s jurisdiction during the COVID-19 pandemic. This guidance, along with the Division’s general rule of providing a credit for taxes imposed by multiple states, makes it likely that a New Jersey resident employed in New York but working from home in New Jersey would be able to claim a credit for taxes paid to New York, subject to the general credit limitations.
