Imagine working remotely from the sunny shores of Australia for a New York-based employer, thinking you’re safely outside the grasp of U.S. state taxes.
Think again.
Due to the often-overlooked and widely misunderstood “convenience of the employer” rules, many individuals living abroad who work remotely for American companies are being caught unaware by state taxation. These arcane rules are increasingly relevant in our globalized and remote-first work environment, especially impacting digital nomads and expatriates.
What Exactly Is The “Convenience of Employer” Rule?
At its core, the “convenience of the employer” rule says that if you’re working remotely from another jurisdiction out of personal preference rather than explicit employer necessity, you could still owe state taxes to the state where your company is based. Even if you’ve never set foot in that state, the logic of this rule asserts that you owe state tax because your work location choice was “for your convenience,” not your employer’s.
Which States Enforce This Rule?
The most infamous of these is New York, which aggressively applies this rule and has extensive case law supporting its stance. But New York isn’t alone.
Connecticut, Delaware, Pennsylvania, and Nebraska (effective from January 1, 2025), as well as Alabama, enforce similar rules. New Jersey imposes it selectively, impacting residents from states with reciprocal rules such as New York and Connecticut.
Surprisingly, states like California and Oregon have not yet adopted such provisions, preferring instead to tax individuals based primarily on their physical presence within the state.
Why Does This Matter?
The impact of these rules is profound and often expensive. Individuals who believe they’re free from state tax obligations because they physically live abroad may find themselves saddled with unexpected tax bills, penalties, and interest. This creates complexity for international remote workers, especially those who assume they’re safe because of international tax treaties or their physical presence abroad.
Real-Life Implications
Take a recent 2023 Alabama tax court case as an example.
An individual living outside Alabama was still found liable for Alabama state taxes because the court determined the remote work arrangement was for the employee’s convenience, not the employer’s. Though this was an isolated ruling, it illustrates how aggressive and varied state interpretations can become.
New York courts have also been largely unsympathetic to taxpayers. In the significant “Matter of Devers” case, New York upheld its right to tax a remote employee who seldom visited the state. While a few taxpayers have successfully argued against this rule, most outcomes have favoured the state, further solidifying New York’s tough stance.
Connecticut introduced its own “convenience rule” largely as retaliation against New York’s aggressive taxation of Connecticut residents working remotely for New York companies. The result is an ongoing interstate tension with complex implications for remote workers.
How To Mitigate Risks
To navigate these risks, it’s essential to understand potential “safe harbor” rules. For instance, New York offers limited safe harbors that, if carefully adhered to, might exempt a remote worker from the convenience rule. One such strategy involves structuring employment agreements explicitly requiring the employee to work remotely due to the company’s necessity rather than the employee’s preference.
However, this approach raises another challenge: employment law. A company must verify whether employing foreign nationals (e.g., Australians) directly from the U.S. entity while permanently working abroad complies with both U.S. and local employment regulations. It might lead to unintended legal and corporate exposure if not correctly structured.
Planning Is Key
For global nomads or expatriates working remotely for companies in affected states, advance planning with specialised tax advisors is crucial. Individuals should understand the specific rules and precedents in their employer’s state. This involves not only drafting robust and defensible employment contracts but also documenting the genuine business necessity of remote working arrangements.
Moreover, employees should explore whether structuring their employment via foreign subsidiaries or affiliated entities might insulate them from the direct application of these state rules. Although more complicated structurally, this approach can offer a stronger defence against aggressive state taxation.
Final Thoughts
The “convenience of employer” rule represents a hidden trap for unsuspecting remote workers globally. States like New York, Connecticut, Delaware, Pennsylvania, Nebraska, and Alabama have demonstrated varying degrees of willingness to apply these aggressive rules, creating uncertainty and potential liability for employees worldwide.
To avoid costly surprises, international remote workers and global nomads must stay informed and engage early with expert tax advice to navigate this complex and evolving landscape.
