Telecommuting Taxes and the "Convenience of the Employer"
June 2005 From the perspective of an employer, telecommuting offers bottom-line savings by stemming employee turnover and cutting facility costs. However, teleworkers and other nonresident high net-worth individuals have become the newest and biggest targets of state taxing authorities.
In a SmartPros education segment, "Telecommuting: Betwixt and Between," to be published later this month*, Arthur Rosen, partner in the New York City office of McDermott, Will & Emery, said some states are taxing a telecommuter in a different state if the location is for the "convenience of the employer." Also, some states are refusing to provide a credit for taxes paid to another state is their physical location is at their residence. According to some states, the business employer must have a business reason that it wants the individual in a specific location.
Most notable is a recent case in New York. This spring the New York Court of Appeals ruled against a Tennessee resident, Thomas Huckaby, who telecommuted for a New York company. Huckaby filed New York nonresident income tax returns, allocating his income between Tennessee and New York, based on the number of days he spent working in each state. Because he spent one-quarter of his time in New York, he paid taxes to New York on one-quarter of his income.
However, under the convenience of the employer rule, if a nonresident chooses to telecommute to a New York employer some or most of the time, the nonresident must allocate the income earned at home to New York. The court said New York could tax the telecommuter on one hundred percent of his income.
This is considered the most aggressive tax case to date that targets telecommuters, and it has drawn harsh criticism from the International Telework Association & Council (ITAC), which estimates 44 million telecommuters in the U.S. and sees the ruling as a discouragement for employers to offer telework.
Rosen said there appears to be a difference between "necessity" and "convenience" that the New York Tax Department hasn't yet recognized. It could be cheaper for the company to have an employer work from home, for instance. According to Rosen, there "is a movement" to "specifically nullify New York's convenience of employer test.
While waiting for the Supreme Court to clarify this issue -- should it so choose to hear it on appeal -- there are steps to remain compliant, said Rosen. He recommends businesses first develop a policy to monitor the location of telecommuters, their hours, type of work and other data. Once the information is collected, the company must review the facts, in light of the tax laws, "and make their own judgment when they have crossed the threshold."
"So long as individuals provide full disclosure on their returns, they should pay tax to the state where they actually do the work. That is contrary to the recent cases in New York," said Rosen. "And therefore it is absolutely essential that there be full disclosure on those returns, in order to avoid penalties."
A new Senate bill (S. 1097) and House bill (H.R. 2558) were introduced on May 23, 2005, addressing the "double taxation" of telecommuters.
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* Visit the SmartPros Professional Education Center for more information.2005 SmartPros Ltd. All Rights Reserved.