Word Association
What’s the first thing that comes to mind when you hear the term “remote work”?
I think of empty offices for which an employer is paying fair market rent, of difficulties in communicating with physically absent employees who would otherwise have been a short walk down the hall, and of lost opportunities for younger persons to learn from observing, or from being mentored in “real time” by, more knowledgeable and experienced folk.
Loss of Revenue
When the same question is posed to a state taxing authority, the first reaction may be one of alarm when the remote work is being performed outside the taxing authority’s jurisdiction by an individual whose employer is located within such jurisdiction.
Under this arrangement, the in-state employer who compensates a nonresident employee in exchange for their services is generally entitled to claim a deduction for the payment of such compensation for purposes of determining the employer’s income tax liability to the state in which it operates.
But what about the amount paid to the employee? Is it within the taxing jurisdiction of the state in which the employer, for whose benefit the employee’s services were provided, is located? In other words, is it sourced to the recipient-employer’s state or to the state in which the services were performed?
If the compensation paid to the remote employee is beyond that the reach of the employer’s state, then the latter jurisdiction will realize a loss of revenue.
How Are States Reacting?
Some states view as a bona fide threat to their tax base the growing use by in-state employers of employees who reside and perform their duties outside the state; this is especially true of those states that seem to have an insatiable thirst[i] for tax revenue.
In response, such a state – take New York,[ii] for example, which is already aggressively pursuing nonresidents with any connection to the State – may “intensify” its efforts to identify “in-state employer / remote-employee” situations to which it may then apply theories like the “convenience of the employer”[iii] or “economic nexus” to source within the state the compensation paid by an in-state employer to a nonresident employee for work performed outside the state.
New York
New York imposes personal income tax on a nonresident individual employee’s taxable income to the extent such income is “derived from or connected with New York sources.[iv]
Compensation for Services
The New York adjusted gross income of a nonresident individual rendering personal services as an employee includes the compensation for personal services entering into his federal adjusted gross income to the extent that such services were rendered within New York.[v]
The state’s regulations go on to state that “[c]ompensation for personal services rendered by a nonresident individual wholly without New York State is not included in his New York adjusted gross income, regardless of the fact that payment may be made from a point within New York State or that the employer is a resident individual, partnership or corporation.”[vi]
Where an employee performs services for their employer both within and without New York, “the portion of the compensation attributable to the services performed within New York State” – i.e., New York sourced – “must be determined in accordance with” the state’s apportionment and allocation rules; that includes the notorious “convenience” rule, described below.[vii]
Withholding NY Tax
Every employer maintaining an office or transacting business in New York and paying any wages subject to New York personal income tax must deduct and withhold tax from those wages.[viii] The amount withheld must be substantially equivalent to the tax reasonably estimated to be due from the inclusion of the wages in the employees’ New York source income. Accordingly, if a nonresident employee performs services only in New York, the tax must be withheld from all wages paid to the employee.
However, if a nonresident employee performs services partly within and partly outside the state, only wages for services performed inside the state are subject to withholding.[ix]
In general, the amount of wages allocable to New York is that part of the total compensation that the number of days worked in New York bears to the total number of days worked both in and out of the state, exclusive of nonworking days.
An employer may determine the portion of wages allocable to New York on the basis of the preceding year, or an employee may furnish the employer with a statement estimating the percentage of his services during the year that will be performed within New York and subject to New York withholding tax.[x] In either case, the employer is required to make the necessary adjustments during the year so that the proper amount of New York personal income tax is withheld for the current year.[xi]
Nonresident Return
A nonresident individual must file a New York State personal income tax return if he has any income from New York sources, and his New York adjusted gross income (determined as if a resident) is more than the New York State standard deduction allowed.[xii]
A nonresident employee is required to report on his New York personal income tax return[xiii] the wages and other compensation received by him for services performed in New York, whether or not his employer withheld tax from those wages or other compensation.
If any amount included in the “Federal amount column” of the nonresident’s return[xiv] represents wage and salary income earned from work performed both within and outside of New York, the nonresident must allocate their wage and salary income among New York and any other work location[xv] to determine the amount earned in New York.
The “Convenience” Rule
In determining the New York source income of a nonresident employee, New York’s personal income tax regulations provide as follows: “If a nonresident employee . . . performs services for his employer both within and without New York State, his income derived from New York State sources includes that proportion of his total compensation for services rendered as an employee which the total number of working days employed within New York State bears to the total number of working days employed both within and without New York State.”[xvi]
However, any allowance claimed by the nonresident employee for days worked outside New York “must be based upon the performance of services which of necessity, as distinguished from convenience,” obligated the employee to perform out-of-state duties in the service of his employer (the “Convenience Rule”).[xvii]
In other words, according to the Convenience Rule, if an employee works for a New York-based employer and telecommutes from an out-of-state location for the employee’s own convenience, those days on which such employee telecommutes are generally considered days worked in New York for wage allocation purposes.[xviii] Only days worked outside New York due to the employer’s necessity can be allocated as workdays outside New York.[xix]
Stated differently, nonresidents who are employed in New York, and who work out-of-state when not required to do so by their employers, must treat those out-of-state work days as if they had been present in New York, which results in their compensation being treated as New York source income.
Thus, by its terms, the Convenience Rule should apply with respect to a nonresident employee for a taxable year – for the purpose of determining the number of days worked outside New York – only where such employee performs at least some services for their employer when the employee is present in New York.
According to New York, however, the Convenience Rule generally applies when the employee is assigned to the employer’s New York office or other New York place of business – presumably the place at which they usually work – regardless of the location at which they actually work.[xx]
Truly remote work, however, presents a different set of circumstances in that it allows the employee to live and work from anywhere outside New York with no expectation of an on-site presence.
Applying the above principles, normal work days spent at home are considered days worked in New York, and days spent working at home that are not normal work days are considered to be nonworking days. Days worked at home are considered New York work days if the employee’s assigned or primary work location is at an established office or other bona fide place of business of the employer (a bona fide employer office) in New York. If the employee’s assigned or primary work location is at an established office or other bona fide place of business of the employer outside New York, then any normal work day worked at home would be treated as a day worked outside New York. If an employee’s assigned or primary office is in New York, any normal work day spent at the home office will be treated as a day worked outside the state if the employee’s home office is a bona fide employer office. Any day spent at the home office that is not a normal work day would be considered a nonworking day.[xxi]
Many Touchpoints
Based on the foregoing, New York will normally have a wealth of information from several different sources regarding a nonresident employee’s activities.[xxii]
To ensure it is not being shortchanged, the state will check the information reported across all of the foregoing filings to determine whether there are any inconsistencies and, when deemed necessary, to demand that the nonresident employee produce detailed support for the tax position on which they, and perhaps their employer, have relied.
It can be a convoluted, frustrating, exhausting, protracted, and expensive[xxiii] process, regardless of the outcome.
There has to be a better way, a fairer way.
“Wayfair, You’ve Got Just What” NY Needs?
Still others have suggested that states look to the U.S. Supreme Court’s decision in Wayfair[xxiv] to support sourcing a remote worker’s wages to the jurisdiction in which their employer is based, rather than the location in which the employee performs the services for which he is being paid.
The reasoning here is derived from Wayfair’s having overruled prior precedent that required a business to have a physical presence in a state in order for the business to have the nexus required to collect and remit sales tax to the state. The Court held that physical presence had to give way to the “far-reaching systemic and structural changes in the economy . . . caused by the Cyber Age.”
Almost immediately after the Supreme Court’s decision, many states extended its reasoning to the application of their income tax to nonresident businesses which did not have a physical presence in the state but who generated substantial amount of revenue from within the state.[xxv]
Some have even applied Wayfair’s economic nexus standards to the taxation of nonresident employees.
Indeed, New York has argued that an employee can be present in the state without needing to physically be there, citing Wayfair for the proposition that the U.S. Constitution does not impose a rigid physical presence requirement as a prerequisite for state income taxation.
For example, in response to a nonresident taxpayer’s argument that he received few governmental services from New York, the Appellate Division stated that “the tax imposed [on the nonresident employee] need not bear an exact relation to the services actually provided to the individual taxpayer.” The Court then added that the taxpayer “continued to derive substantial economic and professional benefits from his primary business [as an employee of a New York employer], which paid his salary and fringe benefits and operated in New York, even during the pandemic. His job still included a prestigious professional affiliation [with a New York employer], institutional support for his [work] and access to the broader New York [business] community. [Taxpayer] was able to earn his salary because of the benefits he receives every day from New York.”[xxvi]
It should come as no surprise that New York is ranked 49th (just above Delaware) in the “The Remote Obligations and Mobility Index” published by The National Taxpayers Union Foundation.[xxvii] All I can say is that New York is consistent – it is ranked 50th in the Tax Foundation’s “State Tax Competitiveness Index.”[xxviii]
Other jurisdictions are more reasonable.
Alabama
For example, in late August of this year, Alabama’s Dept. of Revenue issued a Notice[xxix] to provide guidance to employers regarding their income tax withholding obligations with respect to wages paid to an employee who is not an Alabama resident.
According to the Notice, the employer’s withholding obligations depend primarily on whether the nonresident employee performs services in Alabama and whether the wages are considered Alabama-source income.
The Notice explains generally that an employer should withhold Alabama income tax from wages paid to a nonresident employee only to the extent the wages are attributable to services physically performed by such employee in Alabama.[xxx]
If a nonresident employee performs no services in Alabama during the year, Alabama income tax withholding is not required solely because the employer is located in Alabama.
Thus, if an employee resides outside Alabama and performs all services outside Alabama (including remote work from another state), the wages paid to the employee are not Alabama-source wages and, thus, Alabama income tax withholding is not required.
If a nonresident employee performs services in Alabama, the wages attributable to work performed in Alabama are subject to Alabama income tax withholding unless a statutory exception applies. The Notice directed employers to maintain adequate records of the nonresident employee’s workdays or compensation allocable to Alabama.
Of equal significance, the Dept. also stated that it will not follow the 2023 ruling[xxxi] in which the Alabama Tax Tribunal held that the wages paid to an employee who permanently relocated from Alabama to Idaho but continued to be employed in the same capacity by his Alabama employer would be “taxable as Alabama-sourced income” because he “continued to transact business in Alabama via his employment with” his Alabama-based employer; the physical location from which the services were rendered was basically disregarded.
Makes sense, right? Absolutely. It provides certainty.
Will the Feds Step In?
Just a couple of days before the issuance of the above Notice, the “Multi-State Worker Tax Fairness Act of 2026” was introduced into the Lower Chamber[xxxii] of the U.S. Congress. The proposed legislation would preempt State law by limiting the extent to which States may tax the compensation earned by nonresident telecommuters and other multi-State workers.[xxxiii]
Specifically, the bill (H.R. 10142 ) provides that, in applying its income tax laws to the compensation of a nonresident individual,[xxxiv] a State may deem such nonresident individual to be present in or working in such State for any period of time only if such nonresident individual is physically present in such State for such period and such State may not impose nonresident income taxes on such compensation with respect to any period of time when such nonresident individual is physically present in another State.
The bill also provides that, for purposes of determining physical presence, no State may deem a nonresident individual to be present in or working in such State on the grounds that such nonresident individual is present at or working at home for convenience, or such nonresident individual’s work at home or office at home fails any “convenience of the employer” test or any similar test.
For purposes of determining the periods of time with respect to which compensation is paid, no State may deem a period of time during which a nonresident individual is physically present in another State and performing certain tasks in such other State to be (1) time that is not normal work time unless such individual’s employer deems such period to be time that is not normal work time, (2) nonworking time unless such individual’s employer deems such period to be nonworking time, or (3) time with respect to which no compensation is paid unless such individual’s employer deems such period to be time with respect to which no compensation is paid.
Makes sense. Right?
Will it be enacted? History advises that we not hold our collective breath.
Multistate Tax Commission
The MTC has proposed its own plan for the taxation of wages earned by a remote worker. However, as in the case of many other products of consensus, this plan is unlikely to provide the degree of certainty needed to resolve the question of when a resident employer would be required to withhold income tax with respect to wages paid to a remote nonresident employee.
Briefly, under the MTC’s proposal, an employee’s compensation that is normally subject to withholding of state income tax by an employer would not be treated as sourced in the employer’s state (and, thus, not subject to such withholding) when it is received by a nonresident individual for employment duties performed in such state, if: (a) the nonresident has no other income from sources within the state for the tax year in which the compensation was received; (b) the nonresident is present in the state to perform employment duties for not more than 20 days during the tax year in which the compensation is received (where presence in the state for any part of a day constitutes presence for that day unless such presence is purely for purposes of transit through the state); and (c) the nonresident’s state of residence provides a substantially similar exclusion from source, or does not impose an individual income tax.
Administratively challenging? Probably.
What’s Next?
Is there any nationwide resolution in sight? Not yet.
Until then, states with differing priorities of “social policy” or demands for “public services” will continue to incur differing levels of costs and expenditures, and will pursue tax revenues both within and outside their borders more or less aggressively than other states.
At some point, the states in which remote workers reside may try to establish that the presence and activities of such workers within their borders provides sufficient physical nexus to justify the imposition of the “local” income tax on the employer-business.
Consider, for example, the case of a remote employee of an out-of-state employer. The employee, who works from home, also resides near a customer of their employer and part of their duties includes frequent contact with the customer, perhaps even visits to the customer’s place of business.
Consider also an East Coast employer who hires an employee on the West Coast, or perhaps Hawaii. The employee works from home but their location facilitates almost round-the-clock service for many of the employer’s customers.
Under which of these scenarios would the remote employee’s home state have the more defensible position for the imposition of income tax on the out-of-state employer?
Query whether the factors applied by “Convenience Rule States,” to determine whether an employee’s normal work day spent at their home office will be treated as a day worked outside the employer’s state,[xxxv] may be used by the employee’s state to establish that the employee’s home office is a bona fide employer office for purposes of subjecting the employer to tax in such state.
We have a ways to go, so stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
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[i] I used “thirst” instead of hunger” because it more accurately captures the sentiment, that so many business owners have shared with me over the years, of being bled to death by taxes. It also reminds me of Dracula’s last words to Blade, in Blade III: “The thirst always wins.” At least in New York, unfortunately.
[ii] “Please!” They don’t make them like Henny Youngman anymore. (As long as you’re taking NY, please take Hochul and Mamdani while you’re at it.)
[iii] https://www.taxslaw.com/2026/06/when-is-a-remote-employee-not-remote-enough-to-escape-new-york-tax/#_ednref2. Other states that apply a convenience of the employer rule are Pennsylvania, Delaware, Nebraska, Connecticut, New Jersey, and Arkansas. Massachusetts applied the rule during Covid.
[iv] NY Tax Law Sec. 601(e), Sec. 631.
[v] NY Tax Law Sec. 631(b). 20 NYCRR 132.4(b).
[vi] 20 NYCRR 132.4(b).
[vii] NY Tax Law Sec. 631(c); 20 NYCRR 132.4(b) refers to 20 NYCRR § 132.18.
[viii] NY Tax Law Section 671.
[ix] TSB-M-12(5)I.
New York employers are required to complete the State wages, tips, etc. box of federal Form W-2, according to the guidelines in TSB-M-02(3)I, for any employee who has federal wages subject to New York income tax withholding. These guidelines are also applicable to the amount required to be reported on New York Form NYS-45, “Quarterly Combined Withholding, Wage Reporting and Unemployment Insurance Return,” Part C, column (d).
For example, if an employee does not perform any services in New York for the entire tax year, the employer is not required to report any New York wages in the State wages, tips, etc. box on federal Form W-2.
If at any time during the tax year a nonresident employee performs services in New York, the amount of wages that must be reported in the State wages, tips, etc. box on federal Form W-2 is the same amount of federal wages required to be reported in box 1, Wages, tips, other compensation. That amount is federal wages before any allocation that the employee may have claimed on Form IT-2104.1, New York State, City of New York, and City of Yonkers Certificate of Nonresidence and Allocation of Withholding Tax. The employee will allocate the part of the employee’s federal wages that are attributable to services performed in New York when the employee files his New York nonresident income tax return.
[x] On Form IT-2104.1, New York State, City of New York, and City of Yonkers Certificate of Nonresidence and Allocation of Withholding Tax.
[xi] Note New York’s “14-day rule” under which an employer will not be penalized for failing to withhold New York tax on wages paid to a nonresident employee who performs services both in and out of the State if all of the following conditions are met: (1) The employee is assigned to a primary work location outside of New York. (2) The employer reasonably expects that the employee will work in New York for 14 days or fewer in the calendar year. (3) The employee does not work in New York for more than 14 days. (4) The employee’s compensation is not excepted from the 14-day rule. TSB-M-12(5)I.
Also note that the rule does not affect a nonresident employee’s New York income tax liability based on days worked in the State.
[xii] NY Tax Law Sec. 601(e). “There is hereby imposed for each taxable year on the taxable income which is derived from sources in this state of every nonresident . . . individual . . . a tax which shall be equal to the tax base multiplied by the New York source fraction.”
[xiii] Form IT-203, Nonresident and Part-Year Resident Income Tax Return.
[xiv] On line 1 of Form IT-203.
[xv] By completing an “Allocation of wage and salary income to New York State,” Schedule A on Form IT-203-B, Nonresident and Part-Year Resident Income Allocation.
[xvi] 20 NYCRRR § 132.18.
[xvii] 20 NYCRRR § 132.18. In making the allocation provided for in this section, no account is taken of nonworking days, including Saturdays, Sundays, holidays, days of absence because of illness or personal injury, vacation, or leave with or without pay.
[xviii] “The policy justification . . . [is] that since a New York State resident would not be entitled to special tax benefits for work done at home, neither should a nonresident who performs services or maintains an office in New York State” (Speno v Gallman, 35 NY2d at 256).
[xix] For example, attending a client meeting outside of New York that the employee is required to attend in person would qualify as necessary.
[xx] I once encountered a situation in which a Texas-based employee was “assigned” to their employer’s NYC office. “WTF,” you say. It gets worse. The employer was withholding NY income tax from the employee’s wages. No, you can’t make it up. That being said, the employer was genuinely concerned about how New York would react if the employer failed to withhold. What a reputation to have.
[xxi] see TSB-M-06(5)I.
[xxii] Including W-2, IT-203, withholding by an employer, etc. Then, of course, there’s New York’s aggressive audit program.
[xxiii] Expensive not only for the individual employee but also for their state of residence. For example, a New Jersey resident who is employed by a New York business and assigned to a New York location, his salary will be subject to New York income tax based upon the number of days worked in New York. Under the Convenience Rule, the number of days worked from the employee’s home in New Jersey will be counted as New York workdays. The employee will pay New York income tax in respect of the days he worked in New Jersey. When he prepares his New Jersey resident income tax return, he will report the New York salary but will claim a credit against the New Jersey tax owed on such income. Thus, New Jersey loses tax revenue to New York.
[xxiv] South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018).
[xxv] Hawaii was the first state to adopt an economic nexus threshold based on Wayfair for purposes of taxing the income of nonresidents.
[xxvi] Matter of Zelinsky v Commissioner of Taxation & Fin. of the State of N.Y., 2026 NY Slip Op 04251, July 2, 2026 (Appellate Division, Third Department).
[xxvii] https://www.ntu.org/publications/page/the-remote-obligations-and-mobility-index.
[xxviii] https://taxfoundation.org/statetaxindex/.
[xxix] https://assets.law360news.com/2517000/2517672/notice%20alabama%20income%20tax%20withholding%20guidance%20for%20nonresident%20employees%20-%20alabama%20department%20of%20rev.pdf.
[xxx] Query why Alabama’s legislature hasn’t acted on this front.
[xxxi] Bollinger v. State of Alabama Department of Revenue, Dkt. No. 22-390- LP (March 8, 2023).
[xxxii] https://www.congress.gov/bill/119th-congress/house-bill/10142/all-info#latestSummary-content. Similar legislation has been proposed several times over the last decade or so, but has failed to get beyond the committee to which it was assigned for consideration.
[xxxiii] The bill was introduced by representatives from New Hampshire and New Jersey, two States that have contended with the convenience of the employer rules used by their larger neighbors: Massachusetts and New York, respectively.
You may recall that, during the pandemic, Massachusetts temporarily adopted its own version of the “convenience” rule to tax nonresident employees who began telecommuting following the Commonwealth’s emergency order requiring all nonessential businesses in Massachusetts to close their physical workplaces and facilities.
According to the Commonwealth, all compensation received for services performed by a nonresident who, immediately prior to the emergency order, was an employee engaged in performing services in Massachusetts, and who began performing services from a location outside Massachusetts due to a “pandemic-related circumstance,” would continue to be treated as Massachusetts source income subject to the Commonwealth’s personal income tax.
As we know, New Hampshire reacted to its neighbor’s action by filing a lawsuit against Massachusetts in the U.S. Supreme Court claiming, among other things, that Massachusetts was infringing upon New Hampshire’s sovereignty by seeking to impose a tax upon New Hampshire residents in respect of income they earned in New Hampshire – not in Massachusetts. Unfortunately, the Supreme Court denied cert.
[xxxiv] An individual who is neither a statutory resident, nor a domiciliary, of the State.
[xxxv] See New York’s position in TSB-M-06(5)I. https://www.tax.ny.gov/pdf/memos/income/m06_5i.pdf.