One vexing problem that many employers face is knowing when to withhold New York State income tax on wages paid to their nonresident employees who principally work outside the State, but who perform some services in the State. Failing to comply with these withholding requirements can subject the employer to liability for the failure to withhold tax, as well as related interest and penalties. Only wages paid for services performed in the State are subject to withholding.
In response to what were then growing concerns from businesses and practitioners regarding the compliance and audit difficulties, the Department significantly revised its Withholding Tax Field Audit Guidelines, first in 2004, and again in 2005. Notably, those revisions created a “safe harbor” de minimis rule for employers with respect to wages paid to nonresident employees based outside New York State who work no more than 14 days in the State during the calendar year. The Department has now issued a more concise and accessible technical memorandum explaining employer withholding responsibilities under this “14-day rule.” “Withholding on Wages Paid to Certain Nonresidents Who Work 14 Days or Fewer in New York State,” TSB-M-12(5)I (N.Y.S. Dep’t of Taxation & Fin., July 5, 2012).
Under the 14-day rule, an employer is not required to withhold New York State income taxes on wages paid to a nonresident employee who is based outside the State and who performs services both within and outside the State if (i) the employer reasonably expects that the employee will not work in the State for more than 14 days during the calendar year, and (ii) the employee does not in fact work in the State for more than 14 days. The 14-day rule does not apply to various categories of nonresident employees, including athletes and entertainers. The memorandum also excludes from the 14-day rule protection compensation paid to traveling salespersons whose compensation is based entirely on the volume of business they generate. The earlier Audit Guidelines were silent on this latter category of employee.
The new memorandum also addresses the following issues:
- Employer’s Reasonable Expectation. The 14-day rule does not apply if the employer reasonably expects the employee to be required to work in the State for more than 14 days during the calendar year, even if the employee actually works in the State for less than 14 days. The memorandum does not discuss when an employer’s expectation will be considered “reasonable,” although it can be assumed that the employee’s job responsibilities and prior in-State work activity will be relevant.
- Counting Working Days. While any part of a day worked in the State counts toward the 14 days, days spent in the State solely for job-related training, such as an in-house training course, trade association conference, or professional development seminar or convention, do not count. Although some may view the use of the term “solely” as a scaling back of the job training protection, more likely this has been the Department’s practice before the TSB-M was issued. One possible area where the memorandum may reflect a favorable expansion of the rule is in the number of days that can be considered for job-related training. Under the 2005 Audit Guidelines, the Department’s auditors were instructed to “not count a reasonable number of training days/professional development days.” The new memorandum does not expressly limit the protection to a “reasonable” number of such days, perhaps suggesting that as long as the employee is present in the State solely for jobtraining purposes, the day should not count toward the 14 days.
- After 14 Work Days Are Reached. If the nonresident employee reaches 14 work days in the State, even though expected to work less, the employer must thereafter withhold on all New York State wages paid after the 14th work day. This does not represent a change from the Audit Guidelines, but is a reminder that employers need to monitor the in-State visits of their nonresident employees—and particularly their higher-earning employees—throughout the year.
- Changes in Circumstances During the Year. Where, during the year, an employee is reassigned to a primary work location in the State, or to a different position at the company, that will result in the employee actually working in the State more than 14 days, the employer must thereafter withhold on all State wages paid after the change.
- Employer Reporting Requirements. The memorandum also discusses employers’ reporting requirements with respect to their nonresident employees regardless of the application of the 14-day rule. For example, employers may be required to file quarterly withholding tax returns listing the name, social security number, and wages paid to each employee who resides in or is employed in the State, whether or not the wages are subject to withholding.
It should be kept in mind that the 14-day rule protects the employer from liability, but does not relieve the nonresident employee from having to file a State income tax return and pay the proper tax, even where the employee works 14 or fewer days in the State, if the employee has New York State adjusted gross income in excess of the New York State standard deduction (currently, $15,000 for married individuals filing a joint return). There is no New York City income tax on nonresidents, so the 14-day rule is limited to protection from New York State and City of Yonkers tax.