A Legal Pitfall to Telecommuting
Julie Schwartz Weber September 17th, 2008
As a lawyer and policy specialist, I am, not surprisingly, interested in the legal backdrop of our work-family policy issues. This week, I want to share news about one possible legal pitfall to telecommuting across state lines– the potential to be taxed twice on income by an employee’s resident state, in which the employee teleworks, and the state in which their employer resides.
As my colleague, Sandee Tisdale, has previously discussed on this blog, telecommuting is steadily gaining popularity as a practical business arrangement, especially with the surge in gas prices, an increased awareness of global warming, and the need to conserve energy. Moreover, telecommuting promotes, for many workers, increased work-life balance and engages employees that might otherwise not be able to work (e.g,. older and disabled employees).
And yet, telecommuters and businesses beware! Some states extend the reach of their state income taxes to out-of-state telecommuting employees, even if the worker only comes into the state for work occasionally. This is true in states like New York, where the state imposes its income tax on the entire income of a telecommuter living in another state unless telecommuting is done out of necessity and not just for the “convenience of the employer.” Proving that a telecommuter needs to telecommute is apparently a very difficult thing to do, leaving many individuals unknowingly at risk for loss of income.
While individual employees may well be harmed by being taxed twice on income, the issue is also of critical interest to small businesses, which could be faced with additional significant administrative burdens. For instance, small businesses, many of which are working on a tight profit margin, will likely need to spend additional monies to learn the relevant state tax laws so that they may properly adjust withholding rates for out-of-state telecommuters.
One possible remedy to this telecommuting tax quagmire may be coming by way of federal legislation in the form of the Telecommuter Tax Fairness Act (S 785/ HR 1360). Both the Senate and House have sponsored legislation by that title in 2007. These bills, a form of which has been initiated in the previous three legislative sessions, directly seeks to limit the extent to which states may tax the compensation earned by nonresident telecommuters by requiring nonresident workers to be physically present for work in a state to be taxed on their income. These bills are presently stuck in committee.
So, if you are thinking about telecommuting across state lines, or letting an employee do so, it may be wise to check both of the relevant state’s tax laws. Otherwise, the costs of telecommuting may far outweigh the potential benefits.
We have that issue quite a bit with New Jersey and New York… since NY is very aggressive about maintaining their tax revenues.
The problem of double taxation and loss of income is very real. For more than 10 years I telecommuted, living and working in New Jersey for a company based in Massachusetts. I was required to pay income taxes in both states. It is a hidden, but not insiginicant, cost of telecommuting. I comfort myself with the fact that at least I wasn’t driving to the office every day.
In addition to harming telecommuters and their employers, the telecommuter
tax harms states struggling with budgetary shortfalls.
New York State, for example, which applies the telecommuter tax quite
aggressively, only intensifies its own economic woes by demanding this
anachronistic tax.
One reason the tax is self-defeating for New York is precisely that, as
Ms. Weber suggests, it hurts New York businesses.
New York companies striving to become more competitive nationally and
globally need to authorize work-at-home arrangements to help reduce real
estate and energy costs, attract top talent from a nationwide applicant
pool while lowering recruitment costs and reduce turnover costs. They
need a decentralized staff to help them sustain operations when emergencies
and other disruptions occur – like terror threats, damaging storms, transit
strikes or a flu pandemic.
By frustrating businesses that want to exploit the advantages of telework,
the telecommuter tax makes New York an unattractive place to launch a
business or continue running one.
The hefty and confusing payroll burdens the telecommuter tax imposes on
New York businesses can also drive companies out of the state. Indeed,
The New York Times reported this year on a company planning to leave New
York because addressing the state’s claims under the rule requiring the tax
proved too onerous. See David S. Joachim, “Telecommuters Cry ‘Ouch’ to
the Tax Gods, ” The New York Times, Special Section on Small Business,
Feb. 20, 2008.
The telecommuter tax also threatens to shrink New York’s tax and revenue
base by encouraging nonresident telecommuters to leave New York. Because
the telecommuter tax applies only to telecommuters who spend at least some
work time in New York, nonresidents can escape the telework penalty by
never setting foot in New York for work. They may choose to telecommute
on a full-time basis, or they may seek employment in a different state. In
either event, New York loses the opportunity to tax any of their salary, and
New York’s restaurants and other businesses lose the money part-time
telecommuters would have spent on their in-state days.
By discouraging telework, the telecommuter penalty also undermines New
York’s efforts to tackle the expensive problem of traffic congestion and to
reduce the cost of maintaining and expanding its transportation infrastructure.
In addition to harming New York, the telecommuter tax unfairly strains the
budgets of the states where telecommuters live.
Some states grant their resident telecommuters a credit for taxes they pay
New York on their home state income. However, when the tax rate in New
York is higher than the tax rate in the home state, both the telecommuter
and his state of residence lose: The telecommuter must pay the higher
New York rate on his home state income. And, his home state effectively
forfeits to New York revenue that properly belongs to the home state. In
so doing, the home state subsidizes the public services in New York - even
as the home state provides such services to its own resident who is working
at home. The result for the home state includes underfunded transportation,
schools, police, fire and other essential services.
The Telecommuter Tax Fairness Act would get rid of the
telework penalty and remove the drain on state budgets that the penalty
causes. It has the support of a bi-partisan group of lawmakers in both
Houses of Congress, and it has been endorsed by a diverse range of
stakeholders outside Congress, including telework, taxpayer, small business
and homeowner advocates.
I am a lawyer who writes extensively on the legal consequences of telework,
and an Advisory Board Member of the Telework Coalition (www.TelCoa.org).
I have been working with the Coalition to promote telecommuter tax fairness.
If you are interested in supporting the federal legislation abolishing the
telework penalty, please contact me at goluboffn@gmail.com.
Nicole Belson Goluboff
Yes Johnson, I agree with you. We need to lose some thing to gain something..here, you opted taxes for driving..makes sense..