Tax Notes

By now, we all know that 2020’s unexpected office closures and stay-at-home orders, resulting from the global COVID-19 pandemic, have increased the frequency of telecommuting across the United States. Many employees have traded corporate offices for at-home setups. But unforeseen changes have affected not just the average employee — professional athletes, entertainers, and other high earners have also been affected. Training camps have been replaced by Zoom meetings, and television shows have been filmed from home. This article reviews some of the tax questions raised by this phenomenon, specifically: What are the state and local tax consequences for the income of high earners who have relocated their work environments in light of the pandemic?

The Basics

We begin with a quick recap of basic state income tax principles, using New York as an example. New York imposes income tax on New York resident, part-year New York resident, and nonresident individuals.1 Residents generally are taxed on their worldwide income2 and receive a credit for taxes paid to other states for income sourced to those states.3

Conversely, nonresidents are generally taxed only on the portion of income “derived from or connected with New York sources.”4 Income derived from New York sources includes those items attributable to “a business, trade, profession or occupation carried on in th[e] state.”5 In some instances, New York-source income may include signing bonuses, retention bonuses, severance payments, and other lump sum payments.6 The relevant analysis considers whether the payment is for the execution of a contract, or for another intangible right, or if it is paid based on the performance of a service.7 For example, regarding severance payments, the outcome turns on whether the severance payment was made for services previously rendered or for the recipient’s right to future employment.8 If the severance payment is to compensate the employee-recipient for services previously performed in New York, the receipts constitute New York-source income.9 However, if the nonresident employee-recipient had entered into an employment contract with his employer and the termination pay was made in exchange for the employee’s right to future employment, the income would not be sourced to New York.10