New York Advisory Opinion TSB-A-81(8)I: When an employee earns an incentive bonus for work performed in one year but the bonus isn't paid, or its amount known, until the following year, and the employee is a nonresident by the time it's paid, how is the bonus taxed and how should the employer withhold?

Plain-English summary

Union Carbide Corporation asked the Department how to handle New York withholding on incentive bonuses and discretionary recognition awards paid to employees under two company compensation plans, where some employees had worked in New York during the year the award was earned but were neither New York residents nor working in New York by the time the award was actually paid the following year.

Under both of Union Carbide's plans, no employee had a vested right to an award or bonus during the year the underlying services were performed, and no employee knew during that year whether an award would come or how much it would be - the amounts depended on corporate earnings goals, individual rank and performance (for incentive bonuses), or purely discretionary recognition (for special awards). Because the right to the payment wasn't fixed until the following year, the Department noted that the awards are properly included in federal adjusted gross income - under IRC section 451 - in the year they're actually paid, not the year the services were performed.

That timing matters because New York taxes residents and nonresidents differently: a resident's New York adjusted gross income is federal adjusted gross income with modifications (section 612(a)), while a nonresident's New York adjusted gross income captures only the items connected with or derived from New York sources (section 632(a)). Since the income becomes includible in the payment year rather than the service year, the Department held that an employee's residence AT THE TIME OF PAYMENT controls, not residence during the year services were performed. So for employees who are nonresidents when the award is paid, the award is New York-source income only to the extent the underlying services were performed in New York; if the services were split between New York and elsewhere, the award must be allocated between the two under 20 NYCRR 131.16, the standard allocation regulation, regardless of where the employee lived or worked at the time of payment.

On withholding, the Department confirmed that Union Carbide (as an employer with a New York office transacting business here) must withhold New York tax on these awards under section 671, since they're "wages" for federal withholding purposes and nothing in IRC section 3401(a) excepts them. Withholding is computed in the year of payment, using the special nonresident withholding computation (20 NYCRR 160.6) and the supplemental-wage withholding rules (20 NYCRR 160.4(b)).

What this means for you

Employers paying deferred incentive bonuses or discretionary awards across a service year and a later payment year

Withhold New York tax based on the employee's residence status AT THE TIME OF PAYMENT, not their residence or work location during the year the underlying services were performed - and if the employee is a nonresident by then, allocate the award between New York and non-New York service under the standard regulations rather than treating it as fully taxable or fully exempt.

Employees who move out of New York (or become nonresidents) between earning a bonus and receiving it

Expect your bonus to be taxed based on your residence status when it's actually paid, not when you earned it - moving out of New York before payment can shift you from full New York taxation to New York-source-only allocation, but doesn't eliminate New York tax on the portion tied to New York work.

Payroll and tax departments administering multi-year incentive or recognition programs

Confirm whether a given award plan creates a fixed, determinable right to payment during the service year (which could change the timing analysis) or, like Union Carbide's plans here, leaves the amount and existence of the award unknown until a later year - that distinction determines which year's residence status and withholding rules apply.

Common questions

Q: I earned a bonus for last year's work in New York, but I moved out of state before it was paid this year - is it taxed as New York income?
A: It depends on where the underlying services were performed, not where you live now. If the services were entirely in New York, the bonus is New York-source income even though you're now a nonresident; if performed partly elsewhere, only the New York-allocated portion is New York-source income.

Q: Why does the payment date matter more than the year I actually did the work?
A: Because the award wasn't fixed or determinable until the payment year - no employee knew during the service year whether an award would be granted or how much it would be - so under federal tax timing rules (IRC section 451) it's includible in income, and therefore subject to residence-based New York rules, in the year actually paid.

Q: Does the employer still have to withhold New York tax on a bonus paid to someone who's no longer a New York employee?
A: Yes, to the extent the award is allocable to services performed in New York - the employer withholds in the year of payment using the special nonresident and supplemental-wage withholding computations, regardless of the employee's current work location.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a81_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (8) I
Income Tax
August 26, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I810304B

On March 4, 1981, a Petition for Advisory Opinion was received from Union Carbide
Corporation, 270 Park Avenue, New York, New York 10017.
The Petitioner requests an Advisory Opinion with respect to its obligation to withhold New
York income tax from awards and bonuses paid to employees for services performed during the
preceding year under circumstances whereby certain employees were employed in New York for all
or a portion of such preceding year but were neither residents of New York nor employed in New
York at the time the awards and bonuses were paid.
Union Carbide Corporation has established an employee incentive compensation plan which
provides annual cash bonuses to certain corporate officer and employees. The payment of incentive
bonuses under this plan depends upon the attainment of corporate earnings goals, the rank of each
officer or employee within the organization and his rated performance.
For those not eligible for incentive bonuses, there is a special recognition award program.
Each recognition award is given for a year's outstanding performance on the job or for one or more
significant contributions. The granting of recognition awards is totally discretionary. Ordinarily,
recognition awards are not given to the same employee in successive years.
Under both plans, the awards and bonuses are of necessity awarded and paid in the year
following the year in which the services were performed. No right to receive an award or bonus vests
in any officer or employee during the year in which the services were performed. No officer or
employee knows during that year whether he will receive an award or bonus or how much such an
award will be.
Some officers or employees who are neither residents of New York nor employed in New
York at the time of payment of the awards and bonuses were employed in New York during all or
a portion of the year for which the awards or bonuses are given.
Inasmuch as the officers and employees first become entitled to receive and do receive the
awards and bonuses in the year succeeding the year in which the services were performed, the awards
and bonuses are included in federal adjusted gross income in that succeeding year. (Internal Revenue
Code, § 451).
Section 612(a) of the Tax Law provides that the New York adjusted gross income of a
resident individual is his federal adjusted gross income, as defined in the Internal Revenue Code.
with specified modifications not relevant here.

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (8) I
Income Tax
August 26, 1981
Section 632(a)of the Tax Law provides that the New York adjusted gross income of a non­
resident is the net amount of items of income, gain, loss and deductions entering into his federal
adjusted gross income which are derived from or connected with New York sources.
Thus, the residence of the officers and employees at the time of payment of the awards and
bonuses is determinative. The residence of the officers and employees at the time services were
rendered is irrelevant.
Accordingly, since the officers and employees are non-residents at the time of payment of
the awards and bonuses, the awards and bonuses are included in their New York adjusted gross
income to the extent derived from or connected with New York sources.
The awards and bonuses are derived from or connected with New York sources if the
services for which the awards and bonuses are paid were performed in New York. If such services
were performed only partly in New York, the awards and bonuses are allocated, pursuant to the
provisions of Section 131.16 of the Personal Income Tax Regulations (20 NYCRR 131.16), based
upon services performed within and without New York. The place of employment of the officers and
employees at the time of payment is irrelevant.
Section 671 of the Tax Law provides that every employer maintaining an office or transacting
business within this State and making payment of any wages taxable under the personal income tax
to a resident or non-resident individual is required to deduct and withhold New York personal
income tax from employee wages in an amount substantially equivalent to the tax reasonably
estimated to be due on the employee's wages received during the taxable year.
Section 160.3 of the Personal Income Tax Regulations (20 NYCRR 160.3) provide, in part
as follows: "Payments which are considered wages for Federal income tax withholding purposes are
also wages for purposes of New York State income tax withholding." For Federal income tax
purposes, wages mean all remuneration for services performed by an employee for his employer,
unless expressly excepted by section 3401(a) of the Internal Revenue Code (26 U.S.C. 3401). The
awards and bonuses paid under Petitioner's two plans are not excepted by section 3401(a).
Additionally. bonuses are specifically included in wages subject to federal withholding by Federal
income tax regulations. (26 CFR 31.3401(a)(1)(a)(2)). Furthermore, bonuses have been held to be
wages in the year received and subject to withholding in such year, under the Internal Revenue Code.
(Rev. Rul. 69-649, 1969-2CB 106 and Rev. Rul. 70-471, 1979-2CB 199).
It should be noted that section 160.6 of the Personal Income Tax Regulations (20 NYCRR
160.6) makes special provision for determining the amount of tax to be withheld on wages paid to
non-residents. Additionally, section 160.4(b) of the Personal Income Tax Regulations (20 NYCRR
160.4) makes special provision for determining the amount of tax to be withheld on supplemental
wages, including bonuses.
The Petitioner is therefore advised that under the circumstances stated in the Petition:
1)

awards and bonuses will be considered income of a non-resident:

2)

withholding, if any, is required in the year when the awards and bonuses are paid;

-3­
TSB-A-81 (8) I
Income Tax
August 26, 1981
3)

the awards and bonuses should be included entirely in New York adjusted gross income if
all services for which the awards and bonuses were paid were performed in New York. The
awards and bonuses must be allocated within and without New York to the extent the
services for which the awards and bonuses were paid were performed within and without the
State; and

4)

the amounts to be withheld should be computed pursuant to the provisions of sections
160.4(b) and 160.6 of the Personal Income Tax Regulations (20 NYCRR 160.4; 20
NYCRR 160.6).

DATED: May 22, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau