Is the severance pay a nonresident receives after leaving a New York job subject to New York State personal income tax?

Plain-English summary

Howard F. Gordon, a Connecticut resident, worked as Sales Director for a New York State corporation until December 3, 1999. While employed, he filed New York nonresident returns reporting New York wages based on his number of working days in the state. After his employment ended, he began receiving monthly severance pay that was scheduled to continue until August 31, 2000, and he would not work in New York at all during 2000. He asked the Department of Taxation and Finance whether that severance pay counted as New York source income subject to New York State personal income tax.

The Department explained the general framework first: a nonresident is taxed on income derived from New York sources (Tax Law §§ 601(e), 631(a), 631(b)(1)(B)), and compensation for personal services is New York source income to the extent the services were rendered in New York (20 NYCRR 132.4(b)). Payments connected with the termination of employment or early retirement are generally treated as compensation for personal services under 20 NYCRR 132.4(d)(1). Where such a payment is attributable to services performed both within and outside New York, 20 NYCRR 132.20 provides a formula that allocates the payment based on New York compensation earned over the period consisting of the part of the year before retirement plus the three preceding taxable years.

The Department then drew a key line from prior court and Tax Appeals Tribunal decisions. In Matter of Donahue v Chu and Matter of McSpadden, payments made in exchange for an employee relinquishing a contractual right to future employment - a right originally secured by the employee's promise to work in the future, not connected to New York - were held not to be compensation for past services, and so were not New York source income. By contrast, in Matter of Laurino, a lump-sum payment was taxable because the consideration for it was the employee's continued service actually performed (predominantly in New York) up to a change of corporate control, not a promise about future employment.

Applying that distinction, the Department concluded that unless there was a contractual employment relationship and the severance is paid in exchange for the employee's right to future employment, the payment is treated as compensation for prior services and is New York source income for 2000 under Tax Law § 631. If Gordon's severance is instead compensation attributable to past services performed both within and without New York, the New York-source portion is calculated under 20 NYCRR 132.20, using the same working-day allocation method (20 NYCRR 132.18) he had used in prior years, applied to the period consisting of the part of 1999 before his termination plus the three preceding taxable years. But if the severance payments are instead consideration for Gordon giving up his right to future employment, they are not New York source income for 2000.

What this means for you

Nonresidents receiving severance from a former New York employer

Whether your severance pay is taxable to New York turns on what it's actually paying you for. If it's compensation for the work you already performed in New York, it's New York source income and taxable, allocated the same way your regular wages were - typically by the ratio of New York working days to total working days over the relevant look-back period. If instead your severance is consideration for giving up a contractual right to future employment (for example, a multi-year employment contract you agreed to terminate early), it is not compensation for services and is not New York source income, even if you never work in New York again.

Employers and HR/legal teams drafting termination or severance agreements

How a severance or termination agreement is structured and characterized matters for the departing employee's New York tax exposure. Payments framed as consideration for relinquishing a contractual right to future employment are treated differently from payments framed as compensation for past service or a payoff for early retirement. Clear documentation of what the payment is buying can affect whether it is New York source income.

Accountants and tax professionals

When a nonresident client with New York work history receives severance, look at whether there was an underlying employment contract giving the employee a secured right to future employment, and whether the severance was paid to relinquish that right (Donahue, McSpadden) versus as compensation for service already rendered (Laurino). If the payment is compensation for past services performed partly in and partly out of New York, use the 20 NYCRR 132.20 allocation formula - based on the same working-day method used in the individual's prior New York returns - applied over the taxable year of termination plus the three preceding years.

Common questions

Q: Is severance pay automatically taxable to New York for a nonresident who used to work there?
A: Not automatically. It's taxable as New York source income only if it's compensation for personal services attributable to work performed in New York. If it's instead paid in exchange for relinquishing a contractual right to future employment, it is not compensation for services and is not New York source income.

Q: How is severance pay divided between New York and non-New York sources if the person worked in more than one state?
A: Under 20 NYCRR 132.20, the New York-source portion is calculated using a fraction based on New York compensation over the period consisting of the part of the taxable year before termination plus the three preceding taxable years, applying the same working-day allocation method (20 NYCRR 132.18) used for the person's regular wages.

Q: What made the payments in Donahue v Chu and McSpadden non-taxable?
A: In both cases, the payment was made in exchange for the employee giving up a contractual right to future employment that had been secured by a promise to work in the future - consideration unconnected to New York - rather than as pay for services already performed.

Q: Why was the Laurino payment taxable when Donahue's and McSpadden's weren't?
A: In Laurino, the consideration for the lump-sum payment was the employee's continued service actually rendered, predominantly in New York, up until a change in corporate control - not a promise about future employment - so the payment was compensation for services and New York source income.

Q: Did the Department decide definitively whether Gordon's severance is taxable?
A: No. The opinion lays out both possible outcomes: if the severance compensates Gordon for past New York services, it's taxable and allocated under 20 NYCRR 132.20; if it's paid instead for relinquishing a right to future employment, it is not New York source income for 2000.

Citations and references

• Tax Law § 601(e) - personal income tax on a nonresident's New York source income
• Tax Law § 631(a) - definition of New York source income of a nonresident individual
• Tax Law § 631(b)(1)(B) - income attributable to a business, trade, profession, or occupation carried on in New York
• 20 NYCRR 132.4(b) - nonresident employee's compensation taxable to the extent services rendered in New York
• 20 NYCRR 132.4(d)(1) - termination/early-retirement payments treated as compensation for personal services
• 20 NYCRR 132.18 - working-day allocation method for compensation earned within and without New York
• 20 NYCRR 132.20 - allocation formula for retirement/termination benefits attributable to services performed partly within and partly without New York
• Matter of Donahue v Chu, 104 AD2d 523
• Matter of John A. and Deborah D. Laurino, TSB-D-93(8)I
• Matter of Peter F. and Barbara D. McSpadden, TSB-D-94-(32)I

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a00_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(7)I
Income Tax
September 6, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I000413A

On April 13, 2000, a Petition for Advisory Opinion was received from Howard F. Gordon,
500 Ridgefield Road, Wilton, Connecticut 06897.
The issue raised by Petitioner, Howard F. Gordon, is whether his severance pay is subject to
New York State personal income tax under Article 22 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a resident of Connecticut. Petitioner was employed as a Sales Director by a New
York State corporation until December 3, 1999. Through 1999, Petitioner filed his New York State
personal income tax returns reporting New York wages based on the number of working days in
New York State.
Petitioner will receive monthly severance pay until August 31, 2000. Petitioner will not work
in New York State at any time during 2000.
Discussion
Section 601(e) of the Tax Law imposes a personal income tax for each taxable year on a
nonresident individual's taxable income which is derived from sources in New York State. The tax
is computed as if the individual were a resident, reduced by certain credits, and apportioned to New
York by the New York source fraction, the numerator of which is the individual's New York source
income and the denominator of which is the individual's New York adjusted gross income.
Section 631(a) of the Tax Law provides that the New York source income of a nonresident
individual includes the net amount of items of income, gain, loss and deduction entering into the
individual's federal adjusted gross income derived from or connected with New York sources.
Section 631(b)(1)(B) of the Tax Law provides that items of income, gain, loss and deduction
derived from or connected with New York sources include those items attributable to a business,
trade, profession or occupation carried on in New York State.
For purposes of determining New York source income, section 132.4(b) of the Personal
Income Tax Regulations (“Regulations”) provides that a nonresident individual, rendering personal
services as an employee, includes the compensation for personal services entering into the
individual's federal adjusted gross income to the extent that the individual's services were rendered

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within New York State. Where the personal services are performed within and without New York
State, the portion of the compensation attributable to the services performed within New York State
must be determined in accordance with sections 132.16 through 132.18 of the Regulations.
Section 132.4(d)(1) of the Regulations provides that where an individual formerly employed
in New York State is retired from service and thereafter receives a pension or other retirement
benefit attributable to the individual’s former services, the pension or retirement benefit is not
taxable for New York State personal income tax purposes if the individual receiving it is a
nonresident and if it constitutes an annuity. Where a pension or other retirement benefit does not
constitute an annuity, it is compensation for personal services, and if the individual receiving it is
a nonresident, it is included in New York source income to the extent that the services were
performed in New York State. The term compensation for personal services includes, but is not
limited to, amounts received in connection with the termination of employment, amounts received
upon early retirement in consideration of past services rendered.
Section 132.20 of the Regulations provides that if a pension or other retirement benefit does
not qualify as an annuity under section 132.4(d) of the Regulations and is attributable to services
performed partly within and partly without New York State, the amount includible in the individual’s
New York source income is determined as follows. Multiply the amount of the pension or other
retirement benefit by a fraction, the numerator of which is the amount of total compensation,
included in the individual’s federal adjusted gross income, that was received from the employer for
the services performed in New York State during a period consisting of the portion of the taxable
year prior to retirement and the three taxable years immediately preceding the retirement, and the
denominator of which is the total compensation, included in the individual’s federal adjusted gross
income, that was received from the employer during such period for services performed both within
and without New York State. The compensation for services performed within New York State must
be determined separately for each taxable year or portion of a year in accordance with the applicable
provisions of section 132.17, 132.18 or 132.19 of the Regulations. A determination of the portion
of a pension or other retirement benefit attributable to New York State on the basis of a period of
time greater than that period referred to above may be made if the individual establishes, to the
satisfaction of the Commissioner of Taxation and Finance, the amount of the individual’s total yearly
compensation for a longer period of time and the amount allocable to New York State in each year
in accordance with the applicable provisions of section 132.17 through 132.19 of the Regulations.
In Matter of Donahue v Chu, 104 AD2d 523, the nonresident taxpayer entered into a five­
year employment contract with his New York employer. The agreement provided that at the
conclusion of the five-year period, the taxpayer would provide consulting services over the next ten
years at the rate of $20,000 per year. In the fifth year of the contract, the taxpayer and the employer
entered into a second agreement terminating the initial employment agreement. As consideration
for the relinquishment of these future rights, the taxpayer received the remainder of his final year’s
salary, as well as the sum of $107,361. The Court held that the payment was not New York source

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income, because the right to future employment was originally secured by consideration having no
connection with New York (i.e., the promise to work in the future). When the taxpayer entered into
the contract, he had secured a right to future employment. In the later agreement, which terminated
the employment contract, the taxpayer received a payment in exchange for relinquishing this right.
In Matter of John A and Deborah D. Laurino, Dec St Tax Trib, May 20, 1993, TSB-D-93­
(8)I, the Tribunal stated that it read Donahue, supra, to stand for the proposition that where a
nonresident possesses a right to future employment secured by consideration having no connection
with New York, and relinquishes that right in exchange for a lump sum settlement, the lump sum
settlement is not taxable to New York. It concluded “that in determining whether income is ‘derived
from or connected with New York sources’ it is necessary to identify the activity upon which the
income was secured or earned (Matter of Halloran, [Tax Appeals Tribunal, August 2, 1990]. Thus,
in making this determination, the consideration given by [John Laurino] in exchange for the right
to the income at issue is the controlling factor.” In Laurino, what the employer sought from the
petitioner in exchange for the right to a lump sum payment was the petitioner’s act of continued
service up to the time that a change of control in the corporation occurred. Because it was this
continuing service to the employer performed by the petitioner predominantly in New York which
constituted the consideration for the lump sum payment, the percentage of this payment allocated
to New York was properly taxed, as it was derived from or connected with New York sources.
There was no merit to the petitioner’s argument that the lump sum payment was an alternative to
future employment which would have occurred outside New York and, thus, was not taxable to New
York.
In Matter of Peter F. and Barbara D. McSpadden, Dec St Tax Trib, September 15, 1994,
TSB-D-94-(32)I, the petitioner’s employment contract provided petitioner with employment through
December 31, 1990. Petitioner and his employer negotiated a settlement wherein it was agreed
petitioner would relinquish his contractual rights under the employment agreement in exchange for
a lump sum payment. Petitioner’s rights under the employment agreement were originally secured
by consideration having no connection to New York, i.e., petitioner’s promise to work for the
corporation in the future. Therefore, the petitioner was compensated for all services rendered up to
his termination date of May 18, 1988, and was owed no monies for past services. He did not perform
any future services or employment of any nature and thus was not paid upon retirement for
consultation services. The payment was not severance pay, nor was it made in exchange for a
covenant not to compete. The Tribunal held that the payment in question was not compensation for
personal services rendered, but rather was a payment made in exchange for the taxpayer’s
relinquishment of a future contractual right to employment and was not subject to New York State
personal income tax.
Accordingly, unless there was a contractual employment relationship and the termination pay
is in exchange for the employee’s right to future employment, the payment is considered to be for
prior services and is New York source income to a nonresident (Laurino, supra,). If the severance

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payments are compensation for personal services that are attributable to past services rendered within
New York State such payments are included in the New York source income for taxable year 2000
pursuant to section 631 of the Tax Law. However, if the severance payments are compensation for
personal services that are attributable to past services rendered within and without New York State
pursuant to section 132.4(d) of the Regulations, the portion of Petitioner’s severance pay that is
attributable to New York sources is determined based on the provisions of section 132.20 of the
Regulations. Petitioner states that in prior years, he determined his compensation for services
performed within New York State by the method contained in section 132.18 of the Regulations,
which is based on the number of working days in New York for the taxable year divided by the total
number of working days for the taxable year. This method should be used to attribute the severance
pay that is attributable to past services rendered within New York State using the period consisting
of the portion of the taxable year prior to retirement and the three taxable years immediately
preceding the retirement, as set forth in section 132.20 of the Regulations.
If the severance payments are compensation in exchange for Petitioner’s right to future
employment, the payments are not considered a payment for prior services performed, and such
payments would not be included in New York source income for taxable year 2000 pursuant to
section 631 of the Tax Law.

DATED: September 6, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.