Must a New York company withhold New York State income tax from fees it pays to a non-employee member of its board of directors who is a foreign citizen and resident?
Plain-English summary
A New York corporation appointed an Italian citizen and resident to its board of directors. The director is not an employee, does not live in or travel to New York (he hasn't been in the U.S. since 2017), and the board voted to pay him for his services. Federally, the company must withhold 30% under the U.S.-Italy tax treaty and file Forms 1042 / 1042-S. The company asked whether it must also withhold New York State income tax on those payments.
The Office of Counsel concluded no New York withholding is required. The U.S.-Italy treaty covers only federal taxes and is silent on state tax, so New York's own law controls. Tax Law § 671 requires withholding only on wages paid to an "employee." New York's regulation borrows the federal definition of employee (20 NYCRR 171.1(b); 26 U.S.C. § 3401(c)), which includes a corporate officer but not a director who is not an officer. Because a paid board member who is not an officer is not an employee — the corporation doesn't control his work the way it would an officer's — the company has no withholding obligation under § 671.
What this means for you
Companies with outside directors
Fees paid to a director who sits on your board but is not also a corporate officer are not "wages" subject to New York withholding. (The director may still have his own income-tax filing obligations; that's separate from the company's withholding duty.)
Accountants and payroll professionals
Don't assume federal 1042 withholding on a foreign payee carries into New York. New York withholding turns on whether the payee is an "employee" under the federal definition — corporate officer yes, non-officer director no.
A note on treaties
Tax treaties like the U.S.-Italy Convention bind the federal government, not the states. New York applies its own substantive law regardless of the treaty.
Common questions
Q: We withhold 30% federally under the treaty. Do we also withhold for New York?
A: No. The treaty doesn't reach state tax, and a non-officer director isn't an "employee" for New York withholding.
Q: What if the director were also an officer of the company?
A: A corporate officer is an employee under the federal definition, which would change the analysis.
Q: Does the director still owe New York tax on the fees?
A: That's a separate question about the director's own filing obligations; this opinion addresses only the company's withholding duty.
Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.
Citations and references
Statutes, regulations, and cases:
- Tax Law § 671
- 20 NYCRR 171.1(b); 26 U.S.C. § 3401(c)
- Matter of Manhattan Manor Nursing Home, 117 App. Div. 2d 885 (3d Dept. 1986); Matter of Baldwinsville Federal Savings & Loan, 263 App. Div. 915 (3d Dept. 1942)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao.htm
- Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income/24-7i.htm
- Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/income/a24-7i.pdf
Original ruling text
TSB-A-24(7)I
Income Tax
April 24, 2024
The Department of Taxation and Finance received a Petition for Advisory Opinion from [ REDACTED ]. Petitioner asks whether it is subject to withholding New York State personal income tax on payments made to an Italian citizen and resident, who is a non-employee member of the company’s board of directors (“Foreign Board Member”).
We conclude that Petitioner is not subject to the withholding requirement under Tax Law § 671 with respect to payments Petitioner makes to the Foreign Board Member.
Facts
Petitioner is a corporation with its principal place of business in Tonawanda, New York. Beginning in 2021, Petitioner appointed an Italian citizen and resident to its Board of Directors. The Foreign Board Member does not reside in, or regularly travel to, New York State. He has not been physically present in the United States since 2017, and he has no intention of regular travel to the United States in the future. The Foreign Board Member does not have a U.S. Social Security Number, though he is in the process of obtaining an Individual Taxpayer Identification Number (ITIN).
The Foreign Board Member is not an employee of the taxpayer. However, the Board of Directors recently passed a resolution to compensate him in an amount commensurate with the services he is providing to Petitioner. This compensation is taxable on the federal level under Article 16 of the US-Italian Income Tax Treaty (1999). Therefore, for federal tax purposes, Petitioner is required to withhold 30% and remit such amounts to the IRS electronically. Further, Petitioner is required to file an annual Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and provide the Foreign Board Member with Form 1042-S reflecting both the gross pay and the amounts withheld.
Analysis
The United States government and the government of the Republic of Italy entered into a treaty in 1999 concerning the taxation of each country’s respective citizens performing work in either country, namely, the Convention for the Avoidance of Double Taxation With Respect to Taxes on Income/ Convenzione per Evitare le Doppie Imposizioni in Materia di Imposte sul Reddito (https://home.treasury.gov/system/files/131/Treaty-Italy-8-24-1999.pdf) (“the Convention”). Article 2 of the Convention states that in the case of the United States, the treaty applies to “the Federal income taxes imposed by the Internal Revenue Code (but excluding social security taxes), and the Federal excise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations.” Id. The Convention has no relevant provisions relating to state taxation.
As the Convention is silent concerning the imposition of income taxes by the governments of individual states of the United States, a review of the substantive state law is necessary.
Tax Law § 671 provides, in pertinent part, that:
Every employer maintaining an office or transacting business within this state and making payment of any wages taxable under this article shall deduct and withhold from such wages for each payroll period a tax computed in such manner as to result, so far as practicable, in withholding from the employee's wages during each calendar year an amount substantially equivalent to the tax reasonably estimated to be due under this article resulting from the inclusion in the employee's New York adjusted gross income or New York source income of his wages received during such calendar year.
In order to determine who constitutes an “employee” for purposes of withholding requirements, the applicable state regulation refers back to the federal definition. 20 NYCRR 171.1(b). The applicable federal definition provides:
(c) Employee.--For purposes of this chapter, the term “employee” includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term “employee” also includes an officer of a corporation.
26 U.S.C. § 3401(c)
A member of a board of directors who is not an officer of the corporation, but receives payment for his or her services, is not considered an employee of the corporation for purposes of the withholding requirement. See, e.g., Matter of Manhattan Manor Nursing Home, 117 App. Div. 2d 885 (3rd Dept. 1986); Matter of Baldwinsville Federal Savings & Loan, 263 App. Div. 915 (3rd Dept. 1942). Unlike a corporate officer, a board member’s work is not controlled by the corporation in such a way as to trigger an employment relationship for purposes of the withholding tax requirement under Tax Law § 671. Thus, Petitioner is not required to withhold New York State income tax from payments made to the Foreign Board Member.
Dated: April 24, 2024
Brian J. McCann
Principal Attorney
Note: An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.