With remote work becoming more prevalent, especially in the tech industry, it’s crucial for businesses to understand the tax implications of having employees work from various locations. One such consideration is New York’s “Convenience of the Employer” rule, which impacts how nonresident employees are taxed. For tech companies considering New York as a headquarters, this rule can influence decisions about where to establish offices and how to structure remote work arrangements.
What is the “Convenience of the Employer” Rule?
The “Convenience of the Employer” rule applies to nonresident employees who work remotely for a New York-based company. Under this rule, if a nonresident employee works from home for their own convenience, rather than out of necessity for the employer, New York considers those days as workdays in New York, making them subject to New York state income tax. Conversely, if remote work is required for business purposes and out of the employer’s necessity, those days can be allocated outside of New York for tax purposes.
How the Rule Impacts Tech Companies
For tech companies that often employ a remote workforce, especially nonresident employees, this rule can lead to complexities in taxation. Companies with headquarters in New York but employees scattered across the U.S. may find that nonresident employees still owe New York income taxes, depending on how their remote work is classified.
Tech companies that rely heavily on remote work may find themselves facing increased tax burdens for employees if the “convenience” of working from home is not carefully structured as a necessity. Failure to properly document the necessity of remote work may result in employees being taxed in New York, even if they physically work in another state.
Planning Opportunities for Tech Companies
When structuring a workforce and choosing a headquarters location, tech companies should consider the following planning strategies to minimize the impact of New York’s and other states’ “Convenience of the Employer” rules:
- Define Remote Work as a Business Necessity: To avoid New York and Delaware tax liabilities, companies can structure remote work as a necessity rather than a convenience. For instance, if certain roles require employees to work closer to clients or to have specialized equipment that is not available at the company’s office, the home office could be classified as a “bona fide employer office”. This requires careful documentation, including employment contracts or policies stating that the remote work location is essential for business operations. The bar is fairly high here and may be onerous for you and your employees to meet.
- Headquarter Location Considerations: Tech companies that expect to maintain a large, remote workforce may want to consider alternative headquarters locations outside of states like New York and Delaware to avoid the convenience rule altogether. States like Florida or Texas may provide tax advantages since they do not have similar rules for taxing remote workers. This could result in a more favorable tax environment for both the company and its employees. It’s important to stay abreast of changes in laws in States where you are considering headquartering as States are proactively trying to find ways to generate tax revenue and the rules today may change tomorrow.
- Utilize Multiple Office Locations: Establishing satellite offices in states where remote employees are based may help tech companies meet the “necessity” requirement. If an employee’s primary work location is a bona fide office outside of New York or Delaware, the company may avoid having their workdays taxed in those states. This can provide tax relief for employees working from other states.
- Audit and Review Remote Work Policies: Regularly reviewing and updating remote work policies to align with tax laws is crucial. Employers should ensure that the nature of remote work is clearly documented as a requirement for the role, particularly for nonresident employees. Creating clear documentation that supports the necessity of working outside of New York or Delaware can help reduce tax exposure for both the company and the employee.
As of 2024, the “convenience of the employer” rule is applied by a few states to determine the taxation of income for nonresident employees who work remotely for in-state employers. This rule requires nonresidents to pay income tax in the state where their employer is located if they work remotely for their own convenience, rather than the employer’s necessity. States with this rule include:
- New York – One of the strictest enforcers of the rule. If a nonresident works remotely outside of New York for their own convenience, they still owe New York state income tax.
- Connecticut – Applies the rule but provides a credit for taxes paid to other states that have similar rules.
- Delaware – Nonresidents working remotely outside Delaware for their own convenience still owe Delaware state income tax.
- Nebraska – Similar to the others, requires remote workers to pay state income tax if the remote work is for their own convenience.
- Pennsylvania – Also enforces this rule for nonresident remote workers.
- New Jersey – New Jersey began enforcing the convenience of employer rule of non-residents in 2024 retroactively to January 1st, 2023. Link to more information here.
The “convenience of the employer” rule can lead to double taxation if the employee’s home state does not provide a credit for taxes paid to the employer’s state, so it’s important for remote workers to plan accordingly.
Conclusion
For tech companies with a significant remote workforce, the “Convenience of the Employer” rule in New York presents a unique tax challenge. By strategically structuring remote work as a business necessity, exploring alternative headquarters locations, and maintaining proper documentation, tech companies can mitigate the tax impacts of this rule. Planning ahead and being aware of the tax implications of remote work can help tech companies attract and retain talent while optimizing their tax obligations.
Navigating the complexities of multi-state tax rules can be challenging, but with proper planning, tech companies can make informed decisions that benefit their business and employees. It’s important to consult with a tax professional and attorney to examine the facts of your company’s circumstances. Consulting the rules New York State has outlined is critical. Feel free to contact our team here to learn more about how we can help you understand your obligations as an employer.