When you work in multiple states during the year, you must allocate your income among those states for tax purposes. New York’s income allocation rules are complex and often disputed in audits, particularly for high-income earners and remote workers.
How Income Allocation Works
If you’re a New York nonresident or part-year resident, you only pay NY tax on your New York source income. For wages, NY source income is determined by where you physically performed the work.
The Allocation Formula
For employees, the basic formula is:
NY Source Wages = Total Wages × (Days Worked in NY / Total Work Days)
Example:
- Total wages: $200,000
- Total work days: 250
- Days worked in NY: 100
- NY source wages: $200,000 × (100/250) = $80,000
What Counts as a “Work Day”
Work days include:
- Days you physically worked (in office or remotely)
- Paid vacation days
- Paid sick days
- Paid holidays
Work days do NOT include:
- Unpaid leave
- Weekends (unless you actually worked)
- Unpaid sick days
Where Did You Work?
The DTF determines work location based on where you physically performed services:
- Office days are allocated to the state where the office is located
- Remote work days are allocated based on where you were physically located
- Travel days are allocated to the state where you performed work that day
The Convenience Rule Complicates Everything
Even if you worked remotely from Texas, New York may treat those days as NY work days under the convenience of the employer rule. This means:
- You allocate based on where you actually worked
- But NY re-characterizes non-NY days as NY days
- Result: More of your income is subject to NY tax
Common Allocation Disputes
1. Telecommuting Days
You claim you worked from home in Florida. The DTF argues:
- Your employer didn’t require remote work (convenience rule applies)
- You don’t have a bona fide home office
- Your work could have been performed in the NY office
- Therefore, those days are NY source income
2. Business Travel
You traveled to client sites in multiple states. The DTF disputes:
- Which days you actually worked vs. traveled
- Whether travel days should be allocated to your home state or the destination
- How to allocate days when you worked in multiple states
3. Bonuses and Equity Compensation
How do you allocate:
- Year-end bonuses (based on where you worked during the year?)
- Stock options (based on where you worked during the vesting period?)
- RSUs (based on where you worked when they vested?)
- Deferred compensation (based on where you worked when earned or when paid?)
4. Part-Year Residents
If you moved mid-year:
- Income earned before the move is NY source income
- Income earned after the move may still be NY source income if it relates to prior NY work
- Deferred compensation and equity comp require special allocation rules
Documentation Requirements
To support your allocation, maintain:
- Daily work location log: Where you physically worked each day
- Travel itineraries: Business trips and client visits
- Employer policies: Remote work requirements and office access
- Home office documentation: Dedicated space, business use, employer acknowledgment
- Email and calendar records: Showing where you were when working
Audit Defense Strategy
When the DTF challenges your income allocation:
- Reconstruct your work location using electronic records, calendars, and travel documentation
- Challenge the convenience rule by proving employer necessity for remote work
- Dispute the DTF’s day count with contemporaneous evidence
- Negotiate over disputed days rather than fighting every single day
- Focus on high-value days (days with the most income allocated)
Special Rules for Specific Income
Different types of income have different sourcing rules:
- Wages: Allocated based on work location
- Bonuses: Allocated based on where work was performed during the bonus period
- Stock options: Allocated based on where you worked during the vesting period
- Partnership income: Sourced to where the partnership does business
- Rental income: Sourced to where the property is located
- Investment income: Generally sourced to your state of residence
How We Help
Our team defends income allocation disputes by:
- Reconstructing work location using all available evidence
- Preparing detailed allocation schedules
- Challenging the DTF’s application of the convenience rule
- Negotiating over disputed days and allocation percentages
- Presenting legal arguments on sourcing rules
Income allocation audits can result in six-figure tax assessments for high earners. If you’re facing an allocation dispute, contact us immediately.
