By Stephen A. Josey
CPA Journal
May/June 2023
The “convenience of the employer” rule for sourcing income to a particular state is anything but convenient for tri-state taxpayers. Most states that levy an income tax look to where an employee’s work is performed in determining whether their income is taxable in that state. For example, if an employee physically works in Colorado, income on wages paid to that employee would be subject to Colorado income tax, regardless of where the employer is located. States that employ the convenience of the employer rule—most famously, New York—do things differently, however. Instead of looking to where an employee physically works, these states instead ask where the employer is based, not the physical location where the work is performed. Thus, income performed for New York–based employers is subject to New York state income tax, regardless of the employee’s physical location, unless the employee can prove that the employee’s presence in another state was a necessity of the job and not simply for the employee’s convenience. In a post-pandemic remote work environment, this income-sourcing rule has huge consequences. Further complicating matters, given the particularities of state laws for resident credits (i.e., tax credits afforded to state residents to offset taxes paid to other states), these employees may be subject to dual state income taxation, owing taxes to both the state utilizing the convenience of the employer rule and the state where the work is physically performed.
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