Here’s the scenario: you’re a teleworker that lives in one state for an employer based in another. You work from home 3 days a week and commute across state lines to a company office for the remainder of the week. You may think you would pay income tax based on the state in which you reside or at least your wages would be split between the states based on the proportion of time spent in each (in this case, 60% to your home state and 40% to the state you commute to). Not so for states like New York that apply a “convenience of employer” rule. Under this rule, New York can tax nonresidents telecommuting part-time on all the wages they earn from the New York employer. In other words, you could be double taxed, paying taxes on 100% of your wages to New York and 60% of your wages to your home state. Other states, such as Pennsylvania, Nebraska, and Delaware have similar rules but New York is the only one so far that aggressively enforces it.
Under such rules you could theoretically pay 200% in taxes on the wages you earn at home. You may consider yourself a fulltime teleworker, but even if you traveled to your New York employer for just a few days a year you would be subject to New York’s rule. Sound fair?
Edward A. Zelinsky, a tax law professor for Cardozo Law School in New York, fell into this trap. He worked from his Connecticut home a few days a week but commuted to his university on the remaining days. Zelinsky was required to pay New York tax on his entire New York university salary and taxes on a portion of his salary to Connecticut. A New York court upheld the “convenience of employer” rule and the U.S. Supreme Court declined to hear his constitutional claim. (Zelinsky v. New York State Tax Appeals Tribunal (769 N.Y.S.2d 464 (2003)).
But, wait, it can get worse. States like Georgia tax all income from Georgia based employers, whether an employee steps foot in the state or not. Say you worked out of your home in Florida (hooray, no state income tax!) fulltime for your Georgia employer. You would be required to pay Georgia tax.
Recently, legislation has been introduced to eliminate the double taxation for interstate telecommuters/teleworkers. The Telecommuter Tax Fairness Act was created to prohibit states from taxing nonresidents on the income they earn at home. In short, you should pay taxes on where you are physically present. The bill (S1811) is currently a standalone bill in the hands of the Senate Finance Committee. It was also a submitted amendment (1573) to the Senate transportation bill but not included in the package sent to the House of Representatives last week. For telecommuters, teleworkers, and anyone interested in seeing the expansion of a more distributed workforce, you can do the following: write to Representative Jim Himes (D-CT), who sponsored the bill in the last session of Congress, the House leadership, and your local congressmen and ask to either change the current transportation bill to include the Telecommuter Tax Fairness Act or to pass S1811, the standalone version of the Telecommuter Tax Fairness Act, this session. Additionally, you can get involved by signing the online petition located on the Telework Coalition’s website.
As the workplace continues to change, laws and regulations need to change accordingly for both employers and employees to realize the full benefits of telework.