State income tax has traditionally been one of several factors people consider in deciding to relocate. Currently, however, state taxes are often the primary driving force for relocating. In states like California (14.49% tax), New York (10.99% tax) and New Jersey (11.75% tax), high net income taxpayers continue to migrate to low or no-tax states like Florida, Tennessee or Texas.
In an earlier article published in the New York Law Journal, we discussed the basics of state and local tax residency for New Yorkers because the New York rules are typical of rules in most states. (See “Should I Stay…Or Should I Go?: Understanding Residency Rules.” New York Law Journal. February 17, 2021.)
To quickly review, a resident taxpayer is responsible for reporting and paying New York State personal income tax on income from all sources regardless of where the income is generated or the nature of the income. Of their income reported to New York, a nonresident taxpayer is given the opportunity to allocate income actually generated in New York State. In addition, the nonresident need only report to New York income from intangibles which are attributable to a business, trade or profession carried on in the state. Thus, significant benefits may be derived from filing as a nonresident.
The New York Tax Law defines a resident of New York State as one who:
If a taxpayer believes that they have satisfied the first hurdle and would not be a resident, they should not forget that income received by a nonresident of New York is still taxable to the extent that income is “derived from or connected with New York sources.”
To assist clients in understanding what is New York allocable income, this note will focus on employment compensation, providing an overview of nonresident wage allocation and methodologies for sourcing various types of deferred compensation.
Nonresident employees and officers allocate their wage and salary income to New York using a workday ratio. The logic is that days worked in New York State comprise the numerator, while days worked both in and out of New York go into the denominator, with the resulting fraction designated as the New York wage allocation percentage. Nonworking days such as weekends, holidays, vacation days, sick days and other personal days (e.g., days for house-hunting, days for religious observance) are not included in the denominator, unless services for the employer were performed on these days. This formula would look like:
(NY workdays / total workdays) x total earnings = earnings allocated to NY
Example: A taxpayer received $500,000 of wages in 2025. The taxpayer counted 202 workdays in New York, and their calendar indicated 38 days worked outside New York. The correct formula would be:
(202 / 240) x $500,000 = $420,833
If it later were determined that 10 workdays outside New York were vacation days, the revised formula would be:
(202 / 230) x $500,000 = $439,130
New York and a handful of other states apply a “convenience of the employer” rule which treats all days worked at home for the employee’s own convenience and not for the necessity of their employer as New York workdays. A worker may be obligated to pay state income tax in the state where they live and their employer’s state as well. However, in most cases, the taxpayer would get a credit for the taxes paid where they work, which reduces the income tax liability in the state of residence. The threat of double taxation does arise with respect to investment income because credits for the tax on such income are not available.
While double taxation may be avoided as described in the case above for wages, the fact that relief is not available with respect to investment income is why it is critical not to be a resident of more than one state.
Bonuses are allocated in the same manner as regular wages. If a bonus is received in the same year it is earned, it is allocated on the same basis for which the wage or salary income was allocated for that year.
If the bonus or award is received by a nonresident for services performed in a previous year, it should be allocated on the same basis for which the wage or salary income was allocated for that year. Thus, a bonus paid in February 2026 for work performed in 2025 would be allocated based on the workday allocation fraction applicable to the 2025 year. The taxpayer’s resident status is immaterial because the income is allocated to New York to the extent it is derived from or connected to New York sources.
A nonresident allocates compensation received from serving on a corporate Board of Directors in a manner similar to that of an employee who performs services both within and without New York. Instead of using a day’s worked in/out formula, a nonresident Board member would allocate the compensation by the number of Board meetings attended in New York divided by the number of Board meetings in New York and elsewhere. Days spent preparing for a meeting do not count.
Many types of pension and retirement income are not taxable in New York. For example, for 2026, $30,000 of qualified pension or annuity income is excluded from New York income tax for individuals over age 59 ½. Also excluded are benefits received from New York State, local government or federal retirement systems (including social security).
Commencing in 1996, Public Law Section 104-95 was enacted to prohibit states from taxing most forms of retirement income received by nonresidents. It was necessary to avoid states like California and New York from asserting “source taxation” where the states would tax former residents on pension benefits earned while they lived and worked there while at the same time the states where they relocated could also tax their distributions.
Where the compensation for services is taxable, it does not matter that no services were performed in the current year, so that generally nonresidents may still have a New York tax liability. The allocation formula in such a case is New York compensation in the numerator, and the denominator is the total compensation includible in federal income for the same period. The allocation period is the tax year before retirement, plus three immediately preceding tax years.
A nonresident individual has New York source income from compensation received from stock options, stock appreciation rights or restricted stock if at any time during the allocation period, the nonresident individuals performed services in New York to earn the compensation paid. The income from this type of compensation is reportable to New York in the taxable year that the income is included in the individual’s federal adjusted gross income.
The income is sourced to New York using a workday fraction for the years between the date granted and the date vested. This allocation method can prove problematic when the grant to vest period covers many back years where the workday fraction needs to be substantiated.
Generally speaking, termination pay is any payment legally required upon the termination of employment while severance pay is additional pay to thank long-term employees and help them move on.
The termination pay for nonresidents is sourced to New York based upon the same allocation formula for pensions and retirement benefits. Severance pay on the other hand is based upon the workday ratio for the year employment ends.
In conclusion, the following additional comments should be noted. First, other forms of deferred compensation exist that were not discussed herein, such as covenants not to compete, installment payments, and royalties. In addition, “workday” is not a defined term. However, we do know that it is not limited to full days working in an office. Time on the phone or checking e-mails may constitute a full workday depending upon the length of time of the communications.
Finally, the importance of recordkeeping cannot be overstated. The burden of proof is on taxpayers to document workdays, both New York workdays and non-New York workdays. While in certain instances this may be limited to three prior years, in the case of stock options, this could be five or ten years depending upon when the option was granted.
These days, the New York State Tax Department utilizes a special audit group which focuses just on residency issues. This aggressive group even focuses on nonresidents coming to New York for only a day or two. Residency issues are specialized and challenging. If you are planning a change or have already relocated and have questions regarding tax as a nonresident, please contact Alvan Bobrow at abobrow@bartonesq.com or (212) 885.8878.
Alvan L. Bobrow