Telecommuters: Beware the tax man

Telecommuters employed by a company outside their home state may be at risk of having to pay extra taxes unless Congress adopts a bill protecting them, experts said Tuesday.

The U.S. Supreme Court on Monday refused to hear the appeal of a Tennessee computer programmer who claimed that New York was violating his constitutional rights by forcing him to pay taxes on income he earned in his home state while telecommuting.

The New York tax provision, called "Convenience of the Employer," allows the state to tax nonresidents who choose to telecommute for their New York-based employers for their convenience, but not if it is at the convenience of the employer. The Supreme Court let stand the New York appeals court ruling in favor of the state.

News.context

What's new:
The U.S. Supreme Court refused to hear the appeal of a Tennessee computer programmer who claimed that New York was violating his constitutional rights by forcing him to pay taxes on income he earned in his home state while telecommuting.

Bottom line:
Telecommuters employed by a company outside their home state may be at risk of having to pay extra taxes unless Congress adopts a bill protecting them.

More stories on telecommuting

"That means that at the end of the day telecommuters will be subject to more taxes rather than less taxes," said Scott Clark, who runs the state tax practice for Thelen Reid & Priest in New York.

The technology industry, more than most others, relies heavily on telecommuters who can just as easily fire off e-mails and work on documents or program code in their slippers at home as they can sitting in their cubicle at the office.

Telecommuter advocates were quick to blast the decision.

"It's particularly egregious in light of the fact that telecommuters greatly benefit society in many ways, not the least of which is by consuming fewer of our scarce resources--like petroleum, roadways, and bus or train seats," the American Telecommuting Association said in a statement. "Even with this ruling, however, the ranks of telecommuters will continue to grow because the benefits so far outweigh the costs."

About 45 million people work from home, and the number of employee telecommuters rose 30 percent during the past year, according to ITAC, the Telework Advisory Group for WorldatWork, in research commissioned from The Dieringer Research Group.

"Statutes like that in New York make it very burdensome for individuals who are in a technology-related or e-commerce field to do business," Clark said.

In the Supreme Court case, Tennessee resident Thomas Huckaby told the court he was not opposed to paying tax on the 25 percent of his income that he earned while working in the New York office. However, he objected to being ordered to pay tax on the 75 percent of his income he earned working at his Nashville home. Tennessee does not have income tax.

The ruling "makes it a lot harder for a New York employer to hire an out-of-state telecommuter because they are submitting themselves to New York tax, which is a very high tax," said Peter Faber, Huckaby's attorney. "My concern is that other states may be emboldened by this to adopt a similar approach."

Faber said the New York state tax department's advisory committee, on which he sits, is studying the taxation of telecommuters. "Even though they won in court, they may well relax their position on telecommuters," he said.

An "antiquated" provision?
"The provision is rather antiquated," dating to the 1960s, Clark said. "Quite frankly, it is about time states brought these provisions into the current-day world and recognized the fact that telecommuting is essential to our economy and that it is an everyday fact."

Pennsylvania, Nebraska and New Jersey have similar laws, Faber said. However, New York is more aggressive at enforcement than other states, said Nicole Belson Goluboff, who serves on the advisory board of the Telework Coalition, a telecommuter advocacy group. "Any state may decide that it wants to adopt a similar rule," she said.

"If all of the states go to a convenience-of-the-employer methodology, this is going to cause confusion for people who are telecommuting in one state and maybe never step foot in their employer's home state," said Stephanie Lipinski Galland, who works on the American Bar Association tax section's committee on state and local taxes.

The court's action runs counter to federal efforts to encourage people to drive less and telecommute more, Goluboff said.

The decision "comes at a particularly important time because interest in telecommuting is significantly heightened because of high gas prices, the threat of short fuel supplies and also the potential threat of an avian flu pandemic," she said.

The Telecommuter Tax Fairness Act, reintroduced in the Senate in May, would protect telecommuters from double taxation. The bill is in committee and not yet scheduled for a vote, said a spokeswoman for Sen. Christopher Dodd, a Democrat from Connecticut.

"Congress can resolve this tomorrow. Congress has the power; there's no question," said Walter Hellerstein, a law professor at University of Georgia and author of books on state taxation.

Hellerstein said he could understand why the Supreme Court didn't want to consider the matter. "Where does a telecommuter earn his income? That's a pretty hard question" to answer, he said.

[the Otter]

So what does this mean for 1099-ers?

Does this article only apply to actual, factual W-2 receiving
employees? This law probably wouldn?t apply to me (thank
goodness) because I?m in Indiana and, by pure coincidence, my
company has an office here (only one, but hopefully that?s good
enough!), but what about my colleagues that telecommute from
New York or Arizona? For that matter, what about the guy from
the Ukraine? (Okay, if you?re in the Ukraine and making US
wages, maybe you should have to pay some US taxes, but where
does it end?)

This is a scary situation, IMHO?.

[Too Old For IT]

Not sure about 1099-ers ...

... tho they normally get taxed in the state in which they are located, or organized.

I make 100% of my income in Ohio, but I'm sure if New York could figure out a way to tax my income, while denying me the opportunity to vote in New York elections, they would get `er done.

[markdoiron]

1099er's Aren't Employees--Usually

1099er's aren't employees. unless they are. that is, if you're an employee you should be receiving a w-2. if you're a contractor, then a 1099. if you're reclassified as an employee (an occasional irs action when they feel that contractor status is being used to avoid taxes), then you're an employee and the form that reported your income doesn't matter. you're an employee and will be treated like one by federal and state tax officials. however, if you are reclassified as an employee, you'll have plenty of other financial considerations to keep you busy (you're now entitled to certain benefits such as employer retirement plan, your sep-ira/401k may not be legal, the employer will have to pay back social security payments while you're entitle to a refund on what you paid, etc).

anyway, i'm no tax lawyer, so please take the preceding with a big grain of salt.

mark d.

What about 1099's

The best way to avoid this decision is to start a home-based corporation which then contracts with the company that you do business with and enjoy the full tax benefits of being incorporated.

Form your own corporation to avoid this problem

If you form your own corporation outside of New York, and bill your employer, you may be able to avoid NY taxation AND enjoy the benefits of owning your own corporation.

If you do this, be sure the price you negotiate with your employer takes into account the fact that the employer will not be paying their half of the employment taxes on your wages. Neither will they be paying your benefits. I would add at least 25% to your salary if you worked for a large firm.

Then your company can split your income. 1/2 to be paid as salary (taxable for employment taxes - FICA) and 1/2 as S-distributions that are only taxed as income (not wages). The split here must be reasonable. Talk to your accountant. It can mean significant savings at tax time.

Alan Coffey
Delaware Intercorp, inc.

[dmoffit]

Telecommuters: Beware the tax man

New York legislators are going to drive business out of their state. We are talking about telecommuters. How difficult would it be to set up a router in another state, with the lowest tax, and base the business for telecommuters out of that state!

[Too Old For IT]

Wouldn't need to move the router.

Just find the telecommuter in the state with the lowest tax (no incme tax on out-of-state workers, low corporate taxes ... maybe Nevada) and rent some space ... maybe from an existing telecommuter? and employ all telecommuters through that office.

[chucklw]

We need legislation to address this issue

The Telecommuter Tax Fairness Act of 2005 has been proposed in both the Senate and the House.
We all need to contact our Senators and Congress Men and Women to support it. Information on this bill can be found at http://www.telcoa.org/id158.htm.

Chuck Wilsker
President & CEO
The Telework Coalition
[e-mail]

[kquickkquick]

Taxation without Representation

Another issue of having to pay taxes to a jusidiction that you can't vote for or against the people that are taxing you. If New York proposed a 50% income tax on out-of-state telecommuters, not one of them could vote against it.
How do they inforce this law on out-of-country telecommuters like those in India?

[lewissalem]

They don't..

..collect taxes on telecommuters in different countries. We get to pay for all of the public services. However, when all of the programming jobs are gone, I guess they wont get as much taxes from me. So thats a good thing.

[kenny-J]

The Feds

The Federal Government loves to use interstate commerce as a reason to regulate; this is the basis for much federal law enforcement. So, why the reluctance to take on this issue by the Supreme Court and Congress? Why don't we start taxing offshore outsouced services, particularly customer support, in every state having citizens who receive that service? Big business likes to talk about gobalization, global economy, invisible business borders, etc. If it is an American business outsourcing, then the business is New York, and the outsourced labor are telecommuters. But, very simply, when it comes to money, governments and big business are going to screw the middle class and the gutless legal system is going to roll over and play dead.

[thornsbj]

As long as I can deduct the daily mileage & per Diem...

... at $0.41/mile x Whatever-Distance-Is-Too-Far-To-Actually-Drive, it could easily more than make up for any additional multi-state tax.

Now I just need to find a telecommuting gig in India...

[geek wannabe]

A precedent already exists - sales tax on the internet

It doesn't matter where stuff may physically be located/sent from, if sales tax is due, it is based on the LOCATION of the orderer/delivery.

Would it be so hard to apply the same 'logic' for tax purposes - at least it would be consistant...

[dam7ri]

Sales tax on the Internet actually works like this...

Just like with any mail order, when you are making a mail-order purchase, you must pay sales tax, if the retailer has an outlet in the state in which the order is being shipped to. That means that as long as Amazon.com does not decide to build a store in NY, I don't have to pay sales tax.

What bothers me about my state attempting to collect taxes from this telecommuter is that his income was not earned in NY, even if his paycheck has a NY return address.

I worked for a large music retailer, hq'd in California. Should I have to pay Ca. income tax while working in NY? This is the same exact issue.

You earn at the location where you do your work, not at the corporate office, unless you work in the corporate office.

[p.shearer]

The Telecom Tea-Party

This is basically an instance of taxation without representation. We, as a people, have a precedent for how to deal with this sort of thing. Lets throw all their computers overboard!