While New York State has maintained that non-residents who telecommuted to their NY-based jobs during COVID-19 are still subject to the state’s personal income tax under the convenience of the employer rule, the issue is less clear when it comes to business taxes, such as the NYC Unincorporated Business Tax (UBT).
Partnerships, LLCs or sole proprietorships that are subject to the UBT may be able to realize additional tax savings on their 2020 returns due to their remote workforces. This is because the sourcing of business receipts for UBT purposes is statutorily based on the location where the services are performed, and the convenience of the employer rule does not apply to business taxes.
For example, if a professional services organization that pays UBT had 100 employees working in its NYC office, 100% of the income generated from the services those employees performed would be sourced to NYC for UBT purposes. If, during the pandemic, 60 of those employees worked from home offices outside the city, while 40 worked remotely from their NYC apartments, only 40% of the income generated would be sourced to NYC, reducing the UBT liability.
Things to keep in mind
The tax benefit could be significant, but with it comes the additional compliance of tracking and recording employee locations, in the event of an NYC tax audit. There is also the uncertainty of how NYC will react to this issue in 2021, as many employees remain at home and the city looks for additional ways to address pandemic-fueled budget shortfalls.