Understanding New York's “Convenience of the Employer” Tax Rule
New York’s Convenience of the Employer Rule: What Employers with Remote and Hybrid Workers Need to Know
Remote and hybrid working has made US payroll tax considerably more complicated. Nowhere is that more apparent than New York.
Under New York's Convenience of the Employer (COE) rule, an employee can live — and even perform some or all of their work — outside NewYork while their wages are still treated as New York-sourced income.
For companies building US teams, particularly those hiring employees in neighbouring states, understanding the rule before setting up payroll is important.
What is the Convenience of the Employer rule?
New York generally applies the COE rule where a non-resident employee's assigned or primary office is in New York, but the employee performs some of their normal working days from home or another location outside the state.
The key question is why the employee is working outside New York.
If they are doing so for their own convenience — for example, because they prefer to work from their New Jersey home one day per week — New York generally treats that day as a New York workday for income-tax sourcing purposes.
If the work genuinely has to be performed outside New York because of the employer's business requirements, different treatment may apply.
This can produce a counter intuitive result: where the employee is physically sitting is not necessarily where their salary is sourced for state income-tax purposes.
A common example: living in New Jersey and working in New York
Consider an employee who:
- Lives in New Jersey;
- Is assigned to their employer's New York City office;
- Works in that office four days per week; and
- Chooses to work from their New Jersey home one day per week.
Provided the New York office remains their assigned or primary office and the New Jersey working day is for their own convenience, New York would generally treat all five working days as New York workdays for income-tax purposes.
The employer would therefore generally withhold New York State income tax from 100% of the employee's wages rather than attempting to allocate 20% of their salary to New Jersey simply because they work from home there once a week.
This is one of the most common areas of confusion we see when businesses begin employing people across state lines.
What does “convenience” actually mean?
The terminology can be misleading. It doesn't necessarily mean that working remotely is casual or unnecessary. The distinction is essentially between employee convenience and employer necessity.
Working remotely because an employee wants greater flexibility, has a long commute or prefers to work from home would generally point towards employee convenience.
By contrast, if the employer requires the employee to perform duties outside New York because the work cannot practically be performed at the New York office — for example, because the employee must work at a particular client or operational location — there may be a stronger case that the work is being performed outside New York through employer necessity.
Simply including remote or hybrid working in an employment agreement does not automatically make the arrangement an employer necessity.
Does the number of days spent in New York matter?
Not necessarily. This is one of the most important features of the COE rule. If the employee's assigned or primary office is in New York, normal working days spent at home outside New York can still be treated as New York working days.
That means employers should not automatically take an approach such as:
4 days in New York + 1 day in New Jersey = 80% NY wages and 20% NJ wages.
Under the COE rule, the result could instead be 100% New York-sourced wages. This applies whether the employee attends the New York office four days a week or only occasionally. Spending less time in the office does not, by itself, reduce the proportion of wages sourced to New York.
However, the analysis can change where the employee has an assigned or primary bona fide employer office outside New York or if they work no New York days at all. The COE rule applies to employees who work both inside and outside New York. Where a non-resident employee performs no work in New York at all during the tax year, New York case law indicates that they have no New York-source wage income, even though their employer is based in the state.
This is a genuine distinction, but a narrow one. A single working day in New York, such as a team meeting, a client visit or an annual offsite, can be enough to bring the employee within the rule for that year. Employers relying on this position should be confident that no New York working days will arise, and should monitor attendance rather than assume it.
What is a bona fide employer office?
New York applies a detailed test when determining whether an employee's home office can itself constitute a bona fide employer office. The test is considerably more demanding than simply allowing an employee to work remotely.
New York considers a primary factor, a series of secondary factors and additional factors. The primary factor addresses the employee’s proximity to certain specialised equipment or facilities. It’s therefore likely the secondary and other factors will need to be met. These list several facts and circumstances related to the purpose and function to discern whether the office functions as a bona fide employer office.
Secondary factors (need 4):
1. Employer requires working from the office.
2. Employer has bona fide business purpose for the location.
3. Core duties performed there.
4. Regular meetings with clients.
5. No designated workspace provided at NY branch.
6. Employer reimburses substantial office expenses.
Other factors (need 3):
1. A separate and dedicated telephone line.
2. The location has a business address that is listed on business letterhead, business cards.
3. The office space is used exclusively for work and not for personal purposes.
4. Business records are physically stored at the location.
5. The employee’s name and the address appear in the corporate directory.
6. Signage identifying the business is displayed at the location.
7. The location is listed in public business directories or government registrations as a place of business.
8. The employer maintains business liability insurance covering the office location.
9. The employee claims a home office deduction on their federal tax return (where it’s a home office).
10. The employee is not an officer of the company.
New York's test therefore looks at the substance of the arrangement, rather than simply what an employment contract calls the employee's workplace. Terms such as "hybrid working", references to a "designated" New York office, or an entitlement to work from the New York office a set number of days a week, can all help New York argue that the employee is assigned to New York, even where the arrangement in practice is remote. Contract wording alone won't win the argument, but inconsistent wording will undermine an otherwise good position.
What about coworking offices?
Employers should also be careful about assuming that providing access to a coworking location automatically solves the issue.
Giving an employee a membership that allows them to drop into a shared workspace does not necessarily make that location their assigned or primary employer office.
A much stronger position exists where the employer genuinely establishes an office outside New York — for example, by maintaining dedicated premises from which employees are assigned, supervised and expected to work.
Again, substance matters more than simply having an address.
What happens if the employee lives in another state?
It is very common for employees working in New York to live in a neighbouring state, e.g. New Jersey or Connecticut, and commute into New York for work.
Where an employee primarily physically performs their work in New York — for example, a New Jersey resident who commutes to their employer's New York office four days per week and works from home one day per week — a typical payroll approach is to withhold New York State income tax only, rather than operating dual income-tax withholding at source.
For a New Jersey resident in this position, the employee would generally:
- Have New York State income tax withheld through payroll during the year;
- File a New York non-resident income-tax return at year-end reporting their New York-source income;
- File a New Jersey resident income-tax return, as New Jersey residents are generally taxed on income from all sources; and
- Claim an available New Jersey credit for income tax paid to New York on the same income, subject to New Jersey's applicable rules and limitations.
This approach avoids unnecessarily withholding income tax in both states from the employee's pay throughout the year and leaving them to recover the overlap when they file their returns.
There is an important distinction, however, between a genuine cross-state commuter and an employee who primarily works remotely from their home state but whose income is deemed New York-sourced solely because of the COE rule. The appropriate payroll and registration treatment should therefore be considered based on the employee's actual working arrangement.
Ultimately, an employee's personal income-tax filing position is their own responsibility. Individual circumstances can vary and may change during the year. It is therefore important to make the position clear during the offer and onboarding process: an employee accepting employment across state lines should understand that they may have filing obligations inmore than one state and should seek advice from their own tax adviser or professional where required.
Will the employee be taxed twice?
It depends on their home state
A common assumption is that any overlap between two states resolves itself at year end through a credit. That's often true, but not always.
Most states allow residents a credit for income tax paid to another state. The credit is usually limited to income that the home state itself treats as sourced to that other state, and capped at the home state's own tax on that income. COE rule income is precisely where that limitation causes problems, because New York sources days the employee spends working at home, while their home state may source those same days to itself.
The position differs by state:
Connecticut amended its income-sourcing rules with effect from 2019 to recognise income sourced under another state's convenience rule (Conn. Gen. Stat. §§ 12-704 and 12-711(b)(2)(C)). Connecticut residents working for New York employers can therefore claim a credit for the New York tax paid, including on days worked from home in Connecticut. In practice they pay broadly the higher of the two states' tax, rather than both.
New Jersey introduced comparable provisions from 2023, and its residents can generally claim a credit for New York tax on the same basis, subject to New Jersey's own rules and limits.
Pennsylvania takes a different approach. It doesn't allow a resident credit against income it treats as Pennsylvania-source, which includes days its residents work at home for an out-of-state employer. Where New York sources those same days to New York under the COE rule, both states can tax them. Pennsylvania's flat rate limits the cost, but local earned income taxes may add to it.
Other states. Employees living further afield, for example in California, are often in the weakest position. These states typically credit only the tax paid on days physically worked in New York, leaving home-working days exposed to tax in both states. Where rates in the home state are high, the cost can be significant.
Where an employee lives in a state that doesn't recognise COE rule sourcing, the overlap isn't a timing difference that unwinds on filing. It's a recurring annual cost that should be identified before an offer is made, not discovered when the employee files their first return. For this reason withholding income tax in both states is required throughout the year.
What the courts have said
New York's approach has been challenged repeatedly, and it has consistently been upheld.
Zelinsky v. Tax Appeals Tribunal of the State of New York, 2026 NY Slip Op 04251 (App Div, 3d Dept, 2 July 2026)
The most recent example concerned a Connecticut-resident law professor employed by a New York university. He argued that days he worked at home in Connecticut during the pandemic, when his employer's New York campus was closed to him, should not be treated as New York workdays. New York's Tax Appeals Tribunal rejected the argument in 2025, and the Appellate Division upheld that decision in July 2026. The case demonstrates how narrowly New York interprets "employer necessity". Even a closed office was not enough.
Huckaby v. New York State Division of Tax Appeals, 4 NY3d 427 (2005)
In a 2005 case, an employee living in Tennessee worked mainly from home under an arrangement agreed with his New York employer, spending roughly a quarter of his working time in New York. New York taxed him on 100% of his wages, and the Court of Appeals upheld that. The employer's willingness to accommodate home working did not make it an employer necessity.
Hayes v. State Tax Commission, 61 AD2d 62 (App Div, 3d Dept, 1978)
The limits of the rule were set much earlier. A 1978 decision indicates that the rule only applies to employees who perform work both inside and outside New York. A non-resident who performs no work in New York during the tax year has no New York-source wage income, even where their employer is based in the state. That remains an important boundary, although its application to modern fully remote working has been questioned, and it offers no protection to an employee who works in New York even occasionally.
The practical message from the case law is consistent. New York applies the rule strictly, arguments based on employee preference or practical convenience have not succeeded, and employers should assume the rule will be applied as written unless the facts genuinely place the employee outside it.
Income-tax withholding is not the same as unemployment insurance
This distinction is particularly important for employers and is often overlooked.
The Convenience of the Employer rule is an income-tax sourcing rule. It does not determine every other payroll, employment orregistration obligation.
Unemployment insurance, for example, follows separate multi-state localisation rules.
Consider our earlier employee who lives in New Jersey, works four days per week at their assigned New York office and works one day from their New Jersey home. For income-tax purposes, the COE rule may result in 100% of their wages being treated as New York-sourced.
For unemployment insurance, however, the employer separately considers where the employee's services are localised, their base of operations, where direction and control occurs and, where necessary, their residence.
Where the employee is assigned to and principally works from the New York office, New York may also be the appropriate state for unemployment contributions and the employee would generally look to the New York unemployment system if they subsequently lost their job.
The important point is that we reach that conclusion under the unemployment rules — not because the COE rule says so.
What if the company uses a PEO?
Using a Professional Employer Organization (PEO) adds another layer to the analysis.
Under a PEO arrangement, the PEO will typically process payroll, issue the employee's Form W-2 and remit applicable payroll taxes underthe agreed co-employment structure.
This means employers should distinguish between
- The client company's own employer registrations and payroll obligations;
- Obligations handled by the PEO as the reporting or co-employer; and
- Obligations that may still attach to the client despite using a PEO.
Using a PEO does not, however, make an employee's physicalworking location irrelevant. The PEO and client still need to understand whereemployees actually work so that the appropriate tax, unemployment, workers'compensation and employment requirements can be assessed.
Practical steps for employers
For employers with New York-based hybrid or remote teams, we recommend establishing the position before payroll begins, rather thantrying to correct sourcing retrospectively.
In particular:
- Identify each employee's genuine assigned or primary office.
- Record where the employee is expected to physically work.
- Establish whether out-of-state working is employee convenience or genuine employer necessity.
- Don't automatically apportion wages based solely on physical working days.
- Assess income-tax withholding separately from SUI, workers' compensation and other state employment obligations.
- Review whether any purported out-of-state office genuinely satisfies the relevant requirements.
- Keep documentation supporting the position taken.
- Where the facts are unusual or material amounts are involved, obtain state-specific tax advice.
For companies using a PEO, make sure the PEO understands the employee's actual working pattern rather than simply their residential address.
Why this matters when expanding into the US
For international companies entering the US, the bigger lesson is that US payroll is not simply determined by where an employee lives.
Where the company establishes its first office, where employees are assigned, where they physically perform services and how remote-working arrangements are structured can all affect the outcome.
New York is a particularly good example. A business can hire an employee living in another state and reasonably assume that their days working from home will be taxed there — only to discover that New York considers those same days New York work days.
Getting the structure right at the outset can prevent incorrect withholding, unexpected employee tax bills, penalties and interest as well as unnecessary registrations later.
How In2America can help
At In2America, we help international businesses navigate the operational complexity of employing people across the US, including multi-state payroll, PEO employment, benefits and employment compliance.
Where specialist personal or corporate tax advice is required, we can also work alongside or introduce the appropriate US tax advisers.
If you're building a US team and aren't sure where an employee should be taxed — particularly where New York and remote or hybrid working are involved — speak to the In2America team before setting up payroll.
