In the majority of states, an employee working remotely for a business located in another state would only have tax liabilities in their resident state. However, due to the rise of working remotely and telecommuting in recent years, various states have adopted the Convenience of Employer Rule to regulate income tax withholding. Under the Convenience of Employer Rule, employees working for a business located in one state, but who perform their work from a remote location (i.e., from another state), are subject to the tax laws of their employer’s state. As a result, individuals working for business located in states that have adopted the convenience rule are often subject to double taxation; they must pay income taxes in their resident state as well as their employer’s state.
What are the exceptions to the rule?
In general, the term “convenience” tends to be very broad, with the exceptions being quite narrow. To qualify as an exception under the convenience rule test, an employee must demonstrate that their work must be performed remotely. In other words, if the employee works remotely, but the work they perform could theoretically be done in the state where the business is located, then they would not qualify under the exception. For example, if an employee working for a New York company is tasked with performing a job in neighboring New Jersey, that work would qualify as an exception to the convenience rule since there is no possible way for it to have been performed in New York. On the other hand, an employee working for a New York company, but performing their tasks remotely from their home in Maine, would not qualify under exception since they could technically perform their duties in New York, even though that would be highly inconvenient.
Some states, such as New York, have also created a “bona fide employer office” exception. This allows non-resident workers to bypass the double taxation dilemma created by the convenience rule. However, in order for a home office to be considered a “bona fide employer office,” the employee must meet a specific set of factors. In New York, the factors are divided into three categories (primary, secondary, and other), and in order to qualify, the office must meet either the primary factor or at least four of the secondary factors and three of the other factors.
The primary factor requires the home office to contain or be near specialized facilities which cannot be made available at the employer’s place of business. The secondary and other factors are broader than the primary factor, and include requirements such as: the home office is a requirement or condition of employment; the employee performs some of their core duties of his or her employment at the home office; the employer maintains a separate telephone line for the home office; and business records of the employer are stored at the employer’s home office.
Which states have adopted the rule?
As of now, there are five states which apply the convenience rule: Arkansas, Delaware, Nebraska, New York, and Pennsylvania. A sixth state, Connecticut, applies the convenience rule only if the taxpayer’s resident state applies a similar rule for work performed for a Connecticut employer. This means that a New York resident working at home for a Connecticut employer will qualify under the convenience rule, since New York has implemented the convenience rule.