Tax News Update    Email this document    Print this document  

In informal conversations, the New York State (NYS) Department of Taxation and Finance (Department) told EY that it has instructed many of its personal income tax/withholding tax auditors to pause their current audit cases to help review 2020 income tax filings of certain nonresidents. These nonresidents may have worked for New York-based employers and are seeking refunds of NYS income taxes based on having worked remotely in another state.

NYS applies the "convenience of the employer" rule, under which an employee of a NYS employer may only receive an allowance for days worked outside NYS if the employer required the employee to perform the services outside of NYS. As a result, 100% of all wages earned by a nonresident taxpayer working for a NYS-based employer, either in NYS or working from home (or a location that is not a bona-fide company office in another state), would be considered sourced to NYS unless the employer required the work to be performed outside of NYS.

The Department has sent some of EY's individual clients requests for:

• A W-2, Wage and Tax Statement, from each employer
• A completed Income Allocation Questionnaire (asking for detailed information about where the taxpayer worked on each working day)
• A full description of the composition of wages

Action items to consider

1. Employees who moved in 2020 and did not change their payroll elections should review and consider updating their elections to the extent they should be reallocated to another state's headcount (e.g., NYS to Florida).
2. Employees should understand that not being present in NYS as an employee does not absolve them from New York taxes if nothing else has changed.
3. If an employee is under audit with NYS, his or her legal/tax representative should connect with the auditor to determine whether there might be delays; this approach can help manage client expectations.
4. Employees should determine if their work falls under the NYS bona fide home office exception based on the convenience-of-the-employer rule. See Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax.
5. Employees should consider their resident credit for taxes paid or potentially due to NYS to determine the potential net NYS tax effect of a NYS tax adjustment.

Implications

It appears that NYS is trying to review certain nonresident 2020 filings very quickly to identify certain taxpayers who may owe additional NYS tax under the "convenience of the employer" rule because it has a large inventory of these filings. Accordingly, if you receive a request from the NYS Department as indicated above, consider the action items we provide herein. If you have any questions, please contact a member of the EY Indirect Tax team.

———————————————