Taxing Telecommuting: States Fighting Employee Convenience and Efficiency

With all of the known advantages of telecommuting for employers and employees, including savings for both employers and employees, higher productivity levels, energy savings in office buildings, fewer cars on the road emitting less green house gases, and happier employees, there are still some hurdles to telecommuting in some states. Specifically, certain states will tax employers and/or employees who telecommute, which in some cases not only creates a disincentive for the practice, but also encourages offshoring.

Telebright Software

For instance, Telebright Software, a Maryland based company, in 2004, allowed an employee to relocate to New Jersey and telecommute by writing software code from home. As part of this new arrangement, Telebright withheld New Jersey income taxes from the employee’s wages, rather than withholding Maryland income taxes like they do for the rest of their employees. As it turned out, even with only one employee in the state of New Jersey, Telebright is obligated by the New Jersey Division of Taxation to file a New Jersey corporation business tax return. For Telebright, this obligation seemed outrageous because it did not maintain an office or financial accounts in New Jersey, nor did it solicit sales in the state; besides the single employee, Telebright has no significant ties to New Jersey. In this case, telecommuting really costs the company some major dough.

Why is Telecommuting Being Taxed?

Why did this happen? According to the Journal of Accountancy, in most states, a worker’s income is taxed based on where the employee physically did the work. For example, if an employee works for a South Dakota based company, lives in Iowa, and telecommutes 2 days per week, the employee’s salary would be taxed 60% in South Dakota, and 40% in Iowa. In New York, Pennsylvania, Delaware, New Jersey, and Nebraska, the laws are different. In these states, any earnings are taxed in the employer’s state rather than from where the employee is telecommuting, unless the employee is telecommuting out convenience (instead of necessity).

For example, in the case of Huckaby v. New York State Division of Tax Appeals, Thomas Huckaby was earning wages from a New York-based company but telecommuting from his home in Tennessee, which is a state with no individual income tax on wages. The New York Court of Appeals held that Huckaby had to pay New York State income tax even though Tennessee does not have income tax.

Another example of this tax law is the case of Zelinsky v. New York State Tax Appeals Tribunal. Edward Zelinsky, a tax law professor at New York University, worked part of the time in New York City and part of the time at his home in Connecticut. Zelinsky was required to pay New York State income tax on the entirety of his NYU salary plus Connecticut income tax since working in Connecticut was a convenience rather than a necessity. You would think a tax law professor would understand how it works!

Unfortunately, even with all of the environmental, financial, and work efficiency benefits of telecommuting, tax laws for out-of-state telecommuters can cost both the employer and the employee in big ways. Unfortunately, there is no standardized, nationwide method for taxing telecommuters, although many states are leaning toward a convenience vs. necessity rule like New York, Pennsylvania, Delaware, New Jersey, and Nebraska. Hopefully, employers and employers will be able to see past these costs and join the ranks of the growing population of telecommuters across the nation.