NY Convenience Rule Impacts Remote Production Workers and Film Incentives
I recently received a call from an EP client asking about an employee who worked in their New York production office. The employee had requested to work remotely from New Jersey – a situation that’s coming up more and more often these days – and the team wanted to know how this would impact their accounting.
The production asked two questions:
- Which state is eligible to receive income tax for this employee if they work remotely?
- Will allowing the employee to work from New Jersey reduce the New York film incentive?
Below, I’ll explain how New York income tax laws generally apply to remote employees, and what impact those laws may have on a production's tax incentives. I’ll also provide some context on what rules apply in New Jersey and Connecticut.
Tax implications of remote employees in New York
New York imposes a tax on non-residents for income "derived from sources in" New York, including income from a "business, trade, profession or occupation carried on" in the state. That being the case, if a non-resident production employee works from two locations (one in New York and one in another state), taxable income derived from New York sources would typically be determined by the proportion of days worked in New York vs. days worked everywhere. However, things get a bit more complicated due to the ‘convenience of the employer’ (COE) rule, often referred to as the ‘convenience rule.’
Passed in 2006, COE allows businesses to consider the wages of an individual who 1) is a resident of a state other than New York and 2) who works for a New York-based employer to constitute a New York source of income. The caveat is, if the employee is obligated to work outside the state out of necessity rather than convenience, this rule doesn’t apply. The regulation states, "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 services of his employer."
As an example, if an employee working in New York asks to work from home (in New Jersey) on Wednesdays for the employee’s convenience, and the production agrees to it, New York requires NY taxation for Wednesday’s pay.
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 creates an exception based on physical location. As a result, wages for employees impacted by COE can typically be included in a production’s New York film incentive.
Several other states have followed New York’s lead and have incorporated “convenience of the employer” rules to determine how to tax non-resident remote employee income. These states include Connecticut, Pennsylvania, Arkansas, Delaware, and Nebraska.
COVID’s impact on remote workers in New York
When the State of New York closed nonessential businesses due to the COVID-19 pandemic in mid-March 2020, it was uncertain whether employees working from home due to government mandates should be taxed under the convenience rule.
Many assumed that employees worked remotely out of necessity, not convenience – rendering the convenience rule inapplicable. However, in an October 2020 update, the New York State Department of Taxation and Finance decreed, "if you are a non-resident 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."
What does that mean exactly? To be considered "bona fide," an employer office must satisfy either a primary factor or at least four secondary and three other factors, which are listed below.
Primary factor: The home office contains or is near specialized facilities.
Secondary factors (must satisfy at least four):
- The home office is a condition of employment
- The employer has a bona fide purpose for the home office location
- The employee performs core duties from the home office
- The employee meets or deals with clients regularly at the home office
- The employer does not provide the employee with a designated office space at its regular places of business
- The employer provides reimbursement of substantially all expenses for the home office
Other factors (must satisfy at least three):
- The employer maintains a separate telephone line for the home office
- The home office address is listed on business letterhead
- The employee uses a specific area of the home exclusively for the business
- The employee keeps inventory of products or samples at the home office
- Business records are stored at the home office
- The home office has a sign indicating that it is a place of business
- Advertising for the employer lists the home office
- The home office is covered by business insurance
- The employee is entitled to home office expense deductions
- The employee is not an officer of the company
The definition of a "bona fide employer office" exception is narrow, and therefore few pandemic-related work-from-home arrangements qualify. Meaning, most work-from-home employment was treated as New York-sourced income.
New Jersey tax legislation on remote workers
New Jersey residents and taxpayers who work from home while being assigned to work in New York receive "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, per N.J.S.A. 54A:4-1(a).
Translated, this means a New Jersey resident and taxpayer who is assigned to work in New York, but who is temporarily working remotely from New Jersey, can deduct double tax from their income when filing at the end of the year. The Supreme Court ruled it unconstitutional to dual-tax an individual’s income; this credit provides protections from double-taxation by refunding the duplicate tax at the end of the year.
How did the pandemic affect these rules? A temporary relief period was issued regarding employers withholding tax for teleworking employees based on jurisdiction, but it ended on October 1, 2021. The New Jersey Division of Taxation website states, “As of that date, employers should cease sourcing income in accordance with the employer’s jurisdiction. As required under the long-standing pre-pandemic rules, beginning on and after October 1, 2021, employers should resume sourcing income based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages.”
Along with the general rule of providing a credit for taxes imposed by multiple states, this guidance makes it likely that a New Jersey resident employed in New York, but working from home in New Jersey, can claim a credit for taxes paid to New York, subject to general credit limitations.
Navigating income tax credits for Connecticut resident taxpayers assigned to work in New York
In 2019, Connecticut introduced a limited convenience rule which states, "for the purposes of determining compensation derived from or connected with sources within [Connecticut], a non-resident natural person shall include income from days worked outside this state for such person’s convenience if such person’s state of domicile uses a similar test." While this law applies specifically to Connecticut non-residents who telecommute to Connecticut from out of state, it may apply similarly to Connecticut residents who telecommute into a state that has a convenience rule, such as New York.
Like New Jersey, Connecticut provides residents protection from dual taxation by issuing a credit for any income taxed in Connecticut that is also taxed by another state or political subdivision in the United States within the same tax year. Again, it would be unconstitutional to deny credit in this situation, as it would lead to impermissible double taxation.
In March of 2021, the Connecticut Governor signed legislation clarifying that telecommuters who are residents of Connecticut and are assigned to work in New York would receive a credit on income taxed by both jurisdictions. That means that a Connecticut resident assigned to work in New York, who is working from home in Connecticut, will likely be entitled to a credit for taxes paid to New York, subject to general resident credit limitations.
Dual state tax battles continue
Every state wants to collect tax on any employee who is physically located in their state, regardless of where the employee's company is located, because that income tax is a source of revenue for the state. Not surprisingly, we've seen court cases born from convenience laws that contest the fairness of the law.
As remote work continues to evolve, payroll tax legislation will continue to change. The EP team wants to make sure you understand how complex legislation impacts your production’s payroll taxes and incentives. If you ever have questions, please don’t hesitate to reach out to us.
THIS BLOG CONTAINS GENERAL INFORMATION WE ARE PROVIDING ON A SUBJECT THAT MAY BE OF INTEREST TO YOU. NOTHING IN THIS BLOG SHOULD BE CONSIDERED TAX ADVICE. YOU SHOULD CONSULT WITH YOUR TAX OR LEGAL ADVISORS REGARDING THE APPLICABILITY OF ANY OF THESE RULES TO YOUR SPECIFIC CIRCUMSTANCES AND HOW BEST TO HANDLE THEM.