NEW YORK NONRESIDENT INCOME ALLOCATION under Tax Law §631 and §632 determines which portion of a nonresident's federal adjusted gross income is taxed by New York. CORE RULE Tax Law §631(a)(1): a nonresident's "New York source income" is the sum of all items of income, gain, loss, and deduction entering federal AGI that are: (i) attributable to ownership of real or tangible property located in New York; OR (ii) attributable to a business, trade, profession, or occupation CARRIED ON IN NEW YORK. Tax Law §632(c) authorizes apportionment by regulation when business activities span states. WAGE ALLOCATION FORMULA 20 NYCRR §132.18(a): NY source compensation = total compensation × (NY working days / total working days everywhere). "Working days" exclude Saturdays, Sundays, holidays, sick days, vacation days, and other nonworking days §132.18(a). PARTIAL DAYS - any portion of a day spent working in NY counts as a full NY working day for allocation; transit days handled per TSB-M-06(5)I. NONWAGE INCOME categories sourced separately: business income §631(b)(1)(A) - allocated by business apportionment factors (property, payroll, sales); pass-through K-1 income from partnership/S-corp carrying on NY business; real property gains §631(b)(1)(A)(i) - sourced to NY if NY-located property; intangible property income generally NOT NY source for nonresident UNLESS connected with NY business §631(b)(2); deferred compensation - see Tax Law §631(b)(1)(F) deferred comp from prior NY services. PARTNERSHIP/S-CORP INTEREST DEEMED REAL PROPERTY §631(b)(1)(A)(1) - 2009 amendment: gains on sale of partnership/LLC/S-corp/closely-held C-corp interest treated as NY-source real property gain if >50% of entity's assets are NY real property; 2-year lookback rule to prevent "stuffing." STOCK OPTIONS / RESTRICTED STOCK TSB-M-95(3)I - allocate based on grant-to-vest workdays in NY vs everywhere. DEFERRED COMPENSATION TSB-M-96(2)I - allocate based on services rendered during deferral earning period. FORM IT-203 (Nonresident and Part-Year Resident Income Tax Return) plus IT-203-B Allocation of Wage and Salary Income to NY. CITY OF NEW YORK personal income tax repealed 1999 for nonresidents (Commuter Tax); NY State allocation rules still apply to NY State liability. INTERACTION with CONVENIENCE OF THE EMPLOYER RULE 20 NYCRR §132.18(a) - days worked outside NY only count as non-NY working days if work performed there OUT OF NECESSITY for employer (not employee convenience); see separate guide. RESIDENTS taxed on worldwide income with credit Tax Law §620 for taxes paid to other states; nonresident allocation analysis applies only to nonresidents and part-year residents.
The rule: Tax Law §631 - nonresident pays NY tax on income "derived from or connected with NY sources." Wages allocated by working-day ratio (NY days / total days); business income by apportionment formula; real property income sourced to property location.
Wage formula 20 NYCRR §132.18(a): NY source wages = total wages × (NY working days / total working days). Saturdays, Sundays, holidays, sick, vacation excluded from denominator. Any part of a day worked in NY = full NY day.
Days at home WITHOUT necessity = NY days: Days worked from out-of-state home are NY days unless the employee performed services that out of NECESSITY required out-of-state work (convenience-of-the-employer rule). Pure remote work for personal convenience = NY day.
Partnership/S-corp interest §631(b)(1)(A)(1): Sale of pass-through entity interest treated as NY-source if >50% of entity assets are NY real property; 2-year lookback prevents stuffing.
Forms: IT-203 (nonresident return); IT-203-B (wage allocation schedule); IT-203-A (business allocation); IT-112-R (resident credit not applicable for nonresidents - they file as nonresident only).
| §631 Category | Source Rule |
|---|---|
| Real or tangible property in NY §631(b)(1)(A)(i) | All income attributable to NY-located real or tangible property is NY source; rentals, gains on sale, royalties |
| Partnership/S-corp/closely-held C-corp interests §631(b)(1)(A)(1) | Sale of interest treated as NY real property if >50% of entity assets are NY real property (FMV basis); 2-year lookback rule |
| Business carried on in NY §631(b)(1)(B) | Income from trade, business, profession, or occupation carried on in NY; apportionment under §632(c) regulations |
| Employee wages | Compensation for services performed in NY, allocated under 20 NYCRR §132.18 |
| Self-employment income | NY source if business carried on in NY; allocated by §131-§132 regulations |
| Pass-through K-1 income §631(b)(1)(A) | Distributive share from partnership or S-corp carrying on NY business - NY source to extent of entity's NY apportionment |
| Intangible property §631(b)(2) | Generally NOT NY source for nonresident; EXCEPT where intangible used in NY trade or business (dividends, interest, royalties from NY business) |
| Stock options TSB-M-95(3)I | Allocate based on workdays in NY vs everywhere during grant-to-vest period |
| Restricted stock units TSB-M-07(7)I | Similar to options - allocate by NY workday ratio during vesting period |
| Deferred compensation TSB-M-96(2)I | Allocate based on services rendered during deferral earning period; NY workday ratio in earning period |
| Pensions and annuities | 4 U.S.C. §114 - federal Source Tax Act (1996) prohibits state taxation of nonresident pension income; not NY source regardless of where earned |
| Lottery winnings §631(b)(1)(D) | NY-paid lottery winnings - NY source regardless of nonresident purchase location |
| Gambling winnings other than NY lottery | NY source if NY-based casino/wagering activity |
| Sale of S-corp stock with §338(h)(10) election | Treated as deemed asset sale; gain sourced by §338(h)(10) deemed asset character (real property, intangibles, etc.) |
| Formula Element | Detail |
|---|---|
| Basic formula | NY source wages = total compensation × (NY working days / total working days) |
| Numerator - NY working days | Days actually worked in NY plus days at home or elsewhere that are deemed NY days under convenience-of-employer rule |
| Denominator - total working days | Total days worked everywhere during year; excludes Saturdays, Sundays, holidays, sick days, vacation, leave |
| Part-day rule | Any part of day worked in NY = full NY working day; same for non-NY working days |
| Travel days TSB-M-06(5)I | Days spent traveling for NY employer between NY and non-NY work - allocated based on services performed during travel |
| Nonworking days excluded | Saturdays, Sundays, holidays, vacation days, sick days, personal days - excluded from both numerator and denominator |
| Wages for nonworking days | Salary attributable to nonworking days (vacation pay) prorated based on working-day allocation ratio |
| Multiple employers | Allocation computed separately per employer; each W-2 allocated individually |
| Year of move | Part-year resident files IT-203 with allocation for nonresident period only; resident period income taxed on worldwide basis |
| Bonus paid in year after services | Allocate based on NY workday ratio during PRIOR year when services rendered, not year of receipt |
| Documentation | Calendar/log showing daily location and work activity required for audit; employer travel records, hotel receipts, credit card statements corroborate |
| Burden of proof | Taxpayer must prove non-NY days; default presumption days worked are NY days when working for NY employer |
| Business Allocation Element | Detail |
|---|---|
| Authority | Tax Law §632(c) - business income apportioned by regulation; 20 NYCRR §132.15 business allocation |
| Three-factor formula §132.15 | NY business income = total business income × business allocation percentage (BAP) |
| BAP components | (Property factor + Payroll factor + Sales factor) / 3 - all factors equal-weighted for personal income tax purposes |
| Property factor §132.15(c) | Average value of NY real and tangible personal property / Average value of property everywhere |
| Payroll factor §132.15(d) | NY-source wages paid / Total wages paid everywhere |
| Sales/receipts factor §132.15(e) | NY receipts / Receipts everywhere; market-based sourcing for services post-2015 reform |
| K-1 partnership allocation | Apply partnership's NY BAP to partner's distributive share; reported on K-1 supplement |
| S-corp shareholder allocation | Apply S-corp NY BAP to shareholder's distributive share; reported on K-1 supplement |
| Single-factor sales | NY Corporate Franchise Tax (not personal income tax) generally uses single sales factor for corporations; personal income tax for sole proprietor and pass-through retains 3-factor |
| Form IT-203-A | Allocation of Business Income to NY - reports computation of BAP for sole proprietor / pass-through |
| Real property gains | Sourced to NY based on NY-located property regardless of business allocation; §631(b)(1)(A)(i) |
Facts: Frank is a New Jersey resident employed by NYC-based law firm. 2026 W-2: $300,000. Daily logs show:
- Total working days in 2026: 240 (calendar days minus weekends/holidays/vacation/sick)
- Days physically at NYC office: 144
- Days working from NJ home: 80
- Days at out-of-state client meetings (firm-required travel - genuine business necessity): 16
NJ resident, so subject to NY tax only on NY-source income; remaining income subject to NJ resident tax.
Step 1: Working-day classification:
NYC office days: 144 (clearly NY working days)
Days at NJ home: 80 - convenience-of-employer rule §132.18(a) applies. Frank works from NJ for personal convenience (no employer requirement). These 80 days = NY working days for allocation purposes.
Out-of-state client travel: 16 - business necessity (firm sent Frank to client locations). These are genuine non-NY working days.
NY working days numerator: 144 + 80 = 224
Total working days denominator: 240
Non-NY working days: 16
Step 2: Allocation:
NY allocation ratio: 224 / 240 = 93.33%
NY source wages: $300,000 × 0.9333 = $280,000
Non-NY wages: $300,000 - $280,000 = $20,000 (allocated to NJ home state)
Step 3: NY tax:
File Form IT-203 (NY Nonresident return)
Report NY source income $280,000 on Schedule A
Compute NY tax on $280,000 using NY tax tables (2026 top marginal 10.9%)
NY tax (illustrative): approximately $27,500
Step 4: NJ resident return:
NJ taxes Frank's full $300,000 worldwide income at NJ rates
NJ allows credit for taxes paid to NY on income also taxed by NJ - N.J.S.A. 54A:4-1
Credit equals lesser of: (a) actual NY tax on the doubly-taxed income, OR (b) NJ tax that would have been imposed on the same income at NJ rates
Frank's $280,000 was taxed by both NY (nonresident) and NJ (resident) - eligible for NJ resident credit
If Frank had pre-arranged a "telecommuter agreement" with firm:
Even with formal remote work agreement, NY's convenience-of-employer test under 20 NYCRR §132.18(a) requires that the OUT-OF-STATE work be necessary for the employer (e.g., out-of-state office that employee must staff, NY office closed, employer-required activity that can ONLY be done outside NY). Personal preference to work from home, even with employer permission, does NOT satisfy necessity test - days remain NY working days.
What if Frank's firm closed NYC office permanently:
If firm has NO NY office and Frank no longer commutes to NY, his Connecticut/New Jersey work might no longer be "from NY source." Analysis turns on whether Frank's employer is "doing business in NY" §631; if no, wages may no longer be NY source. Matter heavily fact-specific; see Zelinsky cases for analysis.
20 NYCRR §132.18(a) - days worked from out-of-state home are NY days unless employee performed services there OUT OF NECESSITY for employer. Personal convenience does NOT qualify. Practitioner reporting all home-office days as non-NY days without analyzing necessity creates significant audit exposure; NY Department aggressive in challenging.
Any portion of day worked in NY = full NY working day for allocation. Practitioner counting "morning in NY + afternoon at home" as half-day each misapplies regulation; entire day = NY day.
Saturdays, Sundays, holidays, sick, vacation excluded from denominator. Practitioner using calendar days (365) inflates denominator and underreports NY allocation. Use working days only.
TSB-M-95(3)I - allocate based on workdays in NY during GRANT-TO-VEST period, not exercise year. Practitioner allocating based on exercise year ratio misallocates; grant-to-vest period determines economic source.
2009 amendment - gain on sale of partnership/S-corp/closely-held C-corp interest treated as NY-source real property gain if >50% of entity assets are NY real property at time of sale or any time during 2-year lookback. Practitioner failing to apply lookback can miss NY source characterization; significant NY tax exposure for HNW exiting NY-based operating businesses.
Nonresident allocation under §631-§632 is separate analysis from statutory residency under §605(b). Nonresident with 183+ NY days AND PPA may flip to statutory resident, in which case worldwide income subject to NY tax with §620 credit. Practitioner not testing both must do residency analysis first.
Employee with multiple employers - allocate each W-2 separately. Practitioner aggregating wages and applying single ratio may misallocate when employers have different NY footprints.
Apply entity's NY business allocation percentage (BAP) to distributive share. K-1 should show NY-allocable portion; practitioner not verifying entity-level allocation may carry forward incorrect NY-source flow-through.
Vacation pay, sick pay, severance - prorate based on working-day allocation ratio; same NY ratio applies to nonworking-day compensation. Practitioner sourcing severance to state of residence at termination may misallocate.
Taxpayer must prove non-NY days. Calendar logs, hotel receipts, credit card statements, GPS records, email metadata, employer travel records all relevant. Practitioner relying on memory or estimates loses on audit; require contemporaneous documentation.
Move TO or FROM NY mid-year - file IT-203 as part-year resident. NY taxes worldwide income during resident period; allocates only NY-source during nonresident period. Practitioner filing pure nonresident return for entire year misses resident-period worldwide tax.
1996 federal law prohibits state taxation of nonresident pension/retirement income. Practitioner allocating pension to NY based on prior NY employment misapplies federal preemption; pensions excluded from NY source for nonresidents.
NY City personal income tax repealed for nonresidents (1999 Commuter Tax repeal); nonresidents file NY State only. NY City income tax applies to NYC residents only. Practitioner withholding/reporting NYC nonresident tax error.
Schedule IT-203-B (Allocation of Wage and Salary Income to NY) required when wages partly NY source. Practitioner filing IT-203 without IT-203-B leaves NY source unsupported; audit flag.
TSB-M-96(2)I - deferred comp paid years after services rendered allocated based on NY workday ratio during ORIGINAL EARNING PERIOD. Practitioner sourcing to year of receipt misallocates.
HNW nonresidents with NY employer, large stock option exercises, severance, partnership/S-corp exits, residency changes - all high audit risk. NY Department exceptionally aggressive (one of most active state audit programs); contemporaneous documentation essential.
Connecticut historically denied resident credit for NY convenience-rule tax (CT considered the income CT-source under CT rules); leading to potential double taxation. CT enacted 2018 reciprocity statute. Practitioner advising NY-employed CT residents must coordinate with CT credit analysis to avoid economic double taxation.
Primary authority: NY Tax Law §601 (imposition of tax on residents and nonresidents). §605 (resident defined - domicile + statutory resident two-pronged). §605(a)(1) (resident individual - domiciled in NY). §605(b)(1) (statutory resident - PPA + 183 days). §620 (resident credit for taxes paid to other states). §631 (NY source income of nonresident). §631(a)(1) (general rule - income derived from or connected with NY sources). §631(b)(1)(A) (real or tangible property in NY). §631(b)(1)(A)(i) (real property income). §631(b)(1)(A)(1) (2009 amendment - partnership/LLC/S-corp/closely-held C-corp interest as NY real property when >50% NY real property assets; 2-year lookback). §631(b)(1)(B) (business/trade/profession/occupation carried on in NY). §631(b)(1)(D) (NY lottery winnings). §631(b)(1)(F) (deferred compensation from prior NY services). §631(b)(2) (intangibles - generally not NY source unless connected with NY business). §632 (authority for apportionment). §632(c) (regulatory authority for apportionment). §612 (NY adjusted gross income - residents). §639 (allocation of items from federal AGI). 4 U.S.C. §114 (federal Source Tax Act 1996 - nonresident pension preemption). 20 NYCRR Part 132 (NY source income - regulations). 20 NYCRR §132.4 (real and tangible property income). 20 NYCRR §132.15 (business allocation - 3-factor BAP). 20 NYCRR §132.15(c) (property factor). 20 NYCRR §132.15(d) (payroll factor). 20 NYCRR §132.15(e) (receipts/sales factor). 20 NYCRR §132.16 (apportionment by formula generally). 20 NYCRR §132.17 (allocation of business income by separate accounting). 20 NYCRR §132.18 (employee compensation allocation). 20 NYCRR §132.18(a) (working-day ratio + convenience of employer rule). 20 NYCRR §132.18(b) (commissions and earned by traveling salespersons). 20 NYCRR §132.21 (compensation for personal services performed within state - other rules). 20 NYCRR §132.22 (income from intangible personal property). 20 NYCRR §132.23 (alimony - generally not NY source). TSB-M-95(3)I (stock options - grant-to-vest allocation). TSB-M-96(2)I (deferred compensation - earning-period allocation). TSB-M-06(5)I (May 15, 2006 - convenience of employer rule expansion; bona fide employer office test). TSB-M-07(7)I (restricted stock units). TSB-M-12(5)I (employer withholding - 14-day de minimis rule for nonresident services). Zelinsky v. Tax Appeals Tribunal, 1 NY3d 85 (2003), cert. denied 541 US 1009 (2004) (constitutional challenge to convenience rule). Matter of Zelinsky, DTA Nos. 830517 and 830681 (NY Tax Appeals Tribunal 2025). Matter of Gaied v. NY Tax Appeals Tribunal, 22 NY3d 592 (2014) (residential interest required for PPA). Matter of Obus v. NY Tax Appeals Tribunal, 206 AD3d 1511 (3d Dept 2022) (vacation home not PPA). Form IT-203 (NY Nonresident and Part-Year Resident Income Tax Return). IT-203-B (Allocation of Wage and Salary Income to NY). IT-203-A (Business Allocation Schedule). IT-203-F (Multi-Year Allocation Form - bonuses, deferred comp). IT-112-R (Resident Credit). IT-112.1 (Credit for Income Taxes Paid by Pass-Through Entity). IT-2104 (Employee Withholding Allowance Certificate). NYS-45 (Quarterly Combined Withholding, Wage Reporting, Unemployment Insurance Return).