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Telecommuters: Beware of Double Taxation

A whammy of double taxation faces many telecommuters whose employer is based in one state, and they reside in another. They are paying state incomes taxes to both and many voices are calling “foul”.

Telecommuters who do business in the state of New York have this expense. Thousands who produce the majority of their work product from out of state are affected. However, the tax arrangement also inconveniences employers who are saddled with extra administrative costs requiring them to keep track of various tax laws from other states. Therefore, it seems that the only winner is the state of New York, which rakes in millions.

New York’s telecommuter tax policy is based on a 1960’s rule citing a standard of “convenience of the employer” whereby nonresidents are taxed as if they come to the office everyday, even though they work from home, unless they can prove their employer required them to telecommute. Some states such as Pennsylvania, Nebraska, New Jersey, Delaware and Georgia have similar rulings, but are not as aggressive in enforcing them as New York. Most other states use a “physical presence” test that lets workers pay taxes in proportion to the amount of time-spent working within their jurisdiction.

However, any state that imposes an income tax may enact a “convenience of the employers,” mandate.

"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.

Many businesses, telecommuters, “Greenies” and politicians argue that this double taxation punishes telecommuting. That is exactly what they are trying to promote. They believe that like it or not, telecommuting and employee “flextime” are the wave of the future and a sensible way to address problems such as urban overcrowding, gasoline prices sharply increasing, and the geographical diversity of today’s specialized workforce.

Some politicians are listening to these voices and may be facing the realities of today’s workforce concerning taxation and telecommuting.

The U.S. House of Representatives reported out of committee the “Telecommute Tax Fairness Act of 2007,” which would add language to the U.S. Code enacting a “physical presence” standard for all states when imposing income taxes.

Additionally he U.S. Senate re-introduced a similar act last May. It is stuck in committee and is not yet scheduled for a vote.

If this issue affects you, it may be in your interest to contact your congressperson or senator with your concerns. They will not act unless they hear a concerted voice to listen too.

Posted:Friday, August 15, 2008