New York Advisory Opinion TSB-A-82(11)I: Is an employer's understanding of the rules for employees claiming New York State and City withholding exemptions correct?

Plain-English summary

The New York City Department of Finance's Payroll Division asked the Department to confirm its understanding of employer withholding obligations for State and New York City personal income tax, laying out a detailed statement of the rules it believed applied: that employees generally claim the same exemptions for State/City withholding as for federal withholding, that a federal exemption certificate isn't itself binding for State/City purposes, that certain forms (IT-2104 and IT-2104E) are used in specific situations, and that an employer may deny or revoke an exemption certificate for an employee who doesn't qualify, defaulting to one exemption if the employee then refuses to specify a number.

The Department found the payroll division's understanding "generally correct" but flagged three refinements. First, on the basic exemption-matching rule: an employee's claimed State/City exemptions aren't simply a copy of the federal count - under Tax Law § 671(c)(1) and 20 NYCRR 160.4(d)(1), the number must be reduced by federal withholding exemptions attributable to federal tax credits and increased by withholding exemptions based on New York State tax credits, since state and federal credit structures differ.

Second, on what happens after an employer revokes an employee's State/City exemption certificate: the employee must file Form IT-2104 only in specific circumstances - either because the employee never gave the employer a federal Form W-4 (or gave one claiming full exemption from withholding), or because the employee wants a different number of State/City exemptions than what's shown on the federal W-4. If the employee did file a federal W-4 showing actual withholding facts (not a full-exemption claim), the employer should generally withhold State and City tax based on that W-4's information directly, without requiring a separate IT-2104 in every case.

Third, on the true default when no form has been filed at all: if an employee who doesn't qualify for exemption has filed neither a federal W-4 nor a State IT-2104, the employer should withhold at zero exemptions - not the one-exemption default the payroll division's statement described.

What this means for you

Employers processing New York State and City withholding exemption claims

Don't assume an employee's federal exemption count automatically transfers to State/City withholding unchanged - it must be adjusted for the different federal vs. New York tax credit structure under Tax Law § 671(c)(1).

Employers revoking an employee's exemption certificate

Only require a fresh Form IT-2104 in the specific situations described - when the employee hasn't filed a federal W-4 (or filed one claiming full exemption), or wants a different State/City exemption count than the federal W-4 shows. If a substantive federal W-4 is on file, you may generally withhold based on that form's information.

Payroll offices with no withholding form on file for a non-exempt employee

Default to zero withholding exemptions, not one, when an employee who owes withholding has filed neither a federal W-4 nor a State IT-2104 - withholding at one exemption in that situation under-withholds relative to what the regulations require.

Common questions

Q: Can my employees claim the same number of State and City withholding exemptions as they claim federally?
A: Generally yes as a starting point, but the count must be adjusted - reduced for federal-credit-based exemptions and increased for New York-credit-based exemptions - since it's not a direct one-to-one carryover under Tax Law § 671(c)(1).

Q: After I revoke an employee's State/City exemption certificate, do they always have to file Form IT-2104?
A: No, only in specific situations: if they haven't given you a federal W-4 (or gave one claiming full exemption), or if they want a different State/City exemption count than their federal W-4 shows. Otherwise, you may withhold based on the federal W-4's information.

Q: What withholding rate applies if a non-exempt employee hasn't filed any withholding form at all?
A: Zero exemptions, not one - this was one of the corrections the Department made to the payroll division's original understanding.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a82_11i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82 (11) I
Income Tax
December 31, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I821020A

On October 20, 1982 a Petition for Advisory Opinion was received from the New York City
Department of Finance, Payroll Division, 1 Centre Street, New York, New York 10007.
Petitioner inquires as to whether its understanding of its obligations as an employer to
withhold State and New York City personal income tax, as embodied in the following statement, is
correct:
"An employee is allowed to claim the same number of exemptions for New York State and
City of New York income tax withholding as for Federal income tax withholding purposes (Section
671(c)(1) of the Tax Law). However, a Federal exemption certificate is not binding for State and
City income tax withholding purposes (Reg. Section 160.3(b)). Employees who wish to claim
exemption from Federal income tax withholding but not State and City must file State form IT-2104
indicating a specific number of State and City withholding exemptions. Employees who claim
exemption from Federal income tax withholding and wish to also claim exemption from State and
City income tax withholding must file State form IT-2104E.
"An employer has the right to deny or revoke the State and City exemption certificate of any
employee who does not qualify for exemption under Section 671(a)(3) or Section 601(a)(2) of the
Tax Law. Revocation must be in the form of a written notice. An employee must then file State form
IT-2104, indicating a specific number of State and City exemptions to which he is entitled. If an
employee does not qualify for exemption under Section 671(a)(3) or 601(a)(2) and refuses to indicate
a specific number of withholding exemptions for State and City income tax purposes, the employer
should withhold on the basis of one exemption until the employee completes an IT-2104 specifying
the number of exemptions."
Petitioner's statement is generally correct, with the following exceptions:

1. An employee may claim the same number of exemptions for New York State and City
   personal income tax withholding as he or she is allowed to claim for Federal purposes, less the
   number of such Federal withholding exemptions based on entitlement to Federal tax credits, plus the
   number of withholding exemptions based on the number of credits against New York State personal
   income tax to which the employee is entitled. Tax Law, §671(c)(1); 20 NYCRR 160.4(d)(1).

ROBERT W. BOUCHARD, ACTING COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (8/82)

-2­
TSB-A-82 (11) I
Income Tax
December 31, 1982

2. Upon revocation of a State and New York City exemption certificate, an employee is
   required to file a Form IT-2104 only if (a) he or she has failed to provide the employer with a Federal
   form W-4, or has submitted such form claiming an exemption from withholding, or (b) he or she
   wishes to claim a different number of exemptions for State and New York City purposes than is
   indicated on the Federal form W-4. If the employee filed a Federal form W-4, other than one
   claiming an exemption from withholding, the employer should withhold State and New York City
   income taxes based on the facts included therein.
3. If the employee does not qualify for an exemption from State and New York City
   withholding requirements and has filed neither a Federal form W-4 nor a State form IT-2104, the
   employer should withhold on the basis of zero withholding exemptions. 20 NYCRR 160.1(b); 26
   CFR 31.3401(e)-1.

DATED: December 23, 1982

s/FRANK J. PUCCIA
Director
Technical Services Bureau