Show Me Where the Money Goes! Taxing Income of High Earners

3 December 2020 Tax Notes

Inicio Perspectivas Show Me Where the Money Goes! Taxing Income of High Earners

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 Training camps have been replaced by Zoom meetings, and television shows have been filmed from home.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?

Autores: Georgios I. Tsoflias Jennifer S. White

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

Nonresident employees who perform services both within and outside New York must include in their New York-source income the proportion of their compensation attributable to the services performed in New York. This allocation is generally measured by computing a ratio of total working days in New York over total working days both in and outside New York.¹¹ When allocating the income of professional athletes, New York uses a duty day formula, whereby it includes all days during which the athlete must report to work (as compared with the athlete’s game days).¹²

In determining whether earnings for work performed outside the state should be sourced to New York, the state uses the “convenience of the employer” doctrine.¹³ Under the test, working days spent outside New York must include only those days worked for the necessity of the nonresident’s employer (rather than for the convenience of the employee).¹⁴ In most cases, necessity includes only those instances when (1) the employee telecommutes to be close to a specialized facility, or (2) the employer and employee have taken significant action to treat the employee’s home office as a bona fide office of the business. In response to the COVID-19 crisis, the state recently issued a statement asserting that “if you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.”¹⁵

This article was originally published by Tax Analysts. To read the full article, download the PDF below.

N.Y. Tax Law section 601(a)-(c), (e).
New York residents are taxed on their federal adjusted gross income subject to state-specific modifications and deductions. N.Y. Tax Law section 612.
N.Y. Tax Law section 620(a).
N.Y. Tax Law sections 601(e), 631(a).
N.Y. Tax Law section 631(b)(B).
See N.Y. Comp. Codes R. & Regs. tit. 20, section 132.1(a) (New York AGI of a nonresident individual); see, e.g., N.Y. Comp. Codes R. & Regs. tit. 20, section 132.22(b)(4)(ii)(b) (including signing bonuses paid to professional athletes as New York-source income if the bonuses were paid for the performance of services in the state).
See, e.g., N.Y. Comp. Codes R. & Regs. tit. 20, section 132.22(b)(4)(ii)(b).
Id.
Id.
Id.
N.Y. Comp. Codes R. & Regs. tit. 20, section 132.18(a).
N.Y. Comp. Codes R. & Regs. tit. 20, section 132.22(a)(1), (b)(3).
N.Y. Comp. Codes R. & Regs. tit. 20, section 132.18(a).
Id.
New York State Department of Taxation and Finance, “Frequently Asked Questions About Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax” (updated Oct. 19, 2020).

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