What Is New York’s TSB-M-06(5)I Bona Fide Employer Policy?

New York’s TSB-M-06(5)I Bona Fide Employer Policy affects how businesses handle state income tax withholding for employees working both inside and outside the state. This policy is especially relevant for companies with remote or traveling employees, as it determines whether an employer has a taxable presence in New York.

Employer Obligations

Businesses must determine if they have a sufficient connection, or “nexus,” to New York, requiring them to withhold state income tax. This depends on maintaining an office, having employees perform work in the state, or engaging in business activities that establish a taxable presence. If these criteria are met, employers must register with the New York State Department of Taxation and Finance and comply with withholding and reporting requirements.

Employers must track where employees work, particularly for remote or traveling workers. Under New York’s “convenience of the employer” rule, if an employee works outside the state for personal reasons rather than business necessity, their wages may still be subject to New York tax. Keeping detailed records of employee work locations is essential to ensure correct tax treatment and avoid disputes.

Withheld taxes must be remitted on time. New York requires deposits on a semi-weekly or monthly basis, depending on total tax liability. Businesses withholding over $700 per quarter must remit monthly, while those exceeding $100,000 in accumulated liability must deposit within one banking day. Late payments result in penalties and interest charges.

Qualifying Policies

To be considered bona fide under New York’s TSB-M-06(5)I policy, an employer must demonstrate a legitimate business presence. This includes maintaining a structured payroll system, offering employee benefits in compliance with state labor laws, and ensuring employment agreements reflect genuine work arrangements. Failure to meet these standards can trigger additional scrutiny.

Payroll systems must align with state wage reporting requirements, ensuring wages, bonuses, and other compensation are processed correctly. Employers must provide workers with tax documents, such as W-2 forms, reflecting accurate earnings and withholdings. Discrepancies in payroll records can lead to audits or penalties.

Employee benefits help establish legitimacy. Offering health insurance, retirement plans, and paid leave in line with New York labor laws strengthens an employer’s standing. For example, New York’s Paid Family Leave law mandates most private employers provide paid leave benefits. Noncompliance can result in fines or legal action.

Employment agreements should clearly define job responsibilities, compensation, and work locations. Vague contracts or misclassifying employees as independent contractors can lead to audits, back taxes, and legal disputes.

Withholding Guidelines

New York’s income tax withholding rules require employers to apply the correct tax rates based on an employee’s earnings and filing status. The state uses a progressive tax system, meaning higher wages are taxed at higher rates. Employers must use the most recent withholding tables from the New York State Department of Taxation and Finance to ensure accurate deductions.

Employees may adjust withholding amounts by submitting Form IT-2104, New York’s equivalent of the federal W-4. Those with multiple jobs or additional income may request higher withholding, while employees with significant deductions may qualify for reduced withholding. Employers must process these updates promptly.

Special withholding rules apply to supplemental wages such as bonuses, commissions, and severance pay. In 2024, New York allows employers to withhold at a flat rate of 11.7% for these payments. Alternatively, supplemental wages can be combined with regular earnings and taxed according to standard withholding tables. Employers should inform employees of these options, as they affect take-home pay and year-end tax liability.

Employee Filing Requirements

New York residents and nonresidents earning income sourced to the state must file a personal income tax return using Form IT-201 or IT-203, respectively. Full-year residents are taxed on all income, while nonresidents are taxed only on New York-sourced income. Part-year residents must allocate income based on their residency period, affecting deductions and credits.

Employees working both in and out of New York must track workdays to determine taxable income. Apportionment calculations use a “duty day” methodology, where taxable income is based on the number of days worked in New York compared to total workdays in the year. Nonresidents with periodic assignments in the state must allocate income correctly to avoid underpayment penalties or additional tax liabilities.

Documentation Procedures

Maintaining accurate records is essential for compliance with New York’s withholding requirements. Proper documentation supports tax filings, helps respond to audits, and prevents disputes with tax authorities. Employers must retain payroll records, employee work location logs, and withholding tax filings for at least four years, as required by the New York State Department of Taxation and Finance.

Payroll records should detail wage statements, tax withholdings, and payment dates. Employers must also document any changes to an employee’s withholding elections, such as updates submitted through Form IT-2104. Work location records are particularly important for remote employees or those who travel frequently, as precise tracking of in-state versus out-of-state workdays is required. Employers should implement digital tracking systems or require employees to submit periodic work location reports.

Penalties for Noncompliance

Failure to comply with New York’s withholding and reporting requirements results in financial penalties, interest charges, and potential legal consequences. The state imposes fines for late or incorrect tax payments, with penalties ranging from 5% of the unpaid tax per month, up to a maximum of 25%. Interest accrues on overdue amounts at a rate determined quarterly by the Department of Taxation and Finance.

Employers who fail to withhold or remit taxes properly may face assessments for unpaid amounts and, in cases of willful noncompliance, potential criminal charges. Misclassifying employees or failing to maintain proper records can trigger audits, leading to back taxes, penalties, and interest. In severe cases, legal action may follow, causing financial and reputational damage. Ensuring compliance with withholding and reporting obligations helps businesses avoid these risks and maintain good standing with tax authorities.