Telecommuting: why tax laws may be the reason it is not more popular

Phillip Ingham/flickr.com

At a time when we are virtually connected to our places of work (and everyone else for that matter) at practically any time of the day, why is telecommuting still so unpopular?  Much like the myth of the truly paperless office, long-ago predictions of the virtual office have simply not come to be.

There can be little dispute that there are obvious benefits of telecommuting: reduced overhead costs to the employer, reduced commuting costs to the employee, reduced absenteeism, and even environmental resource conservation. Indeed, there are public health benefits – as demonstrated by the recent swine flu threats – from telecommuting as well.

Nevertheless, the reasons that telecommuting has not gained universal appeal or even majority appeal, are varied and range from fears about worker productivity to loss of networking opportunities.

New York telecommuter tax

For many would-be telecommuters, there is also a very real tax issue that remains a consideration, and in some circumstances, an obstacle to telecommuting. This is because some states, including New York, tax all of the income earned by telecommuters while working some or most of the work week at their “home” offices even if those "home" offices are outside the taxing state.  In other words, New York will tax you for working in New Jersey, Connecticut, or even Tennessee.  (The exception to the New York tax is if the telecommuter never comes into New York State at all.)

Double taxation?

This may result in double taxation if the telecommuter’s “home” state also taxes the income earned while working in the “home” office, without any credit for New York state taxes paid. (Connecticut is one such state.) In fact, even if the telecommuter’s “home” state does not tax the worker or credits the worker for the amount paid in New York State taxes, there are additional issues such as the fact that New York state’s taxation rate may be higher than the home state’s and the fact that New York State income taxes may be used for services and facilities the non-resident does not have access to or need for as a practical matter, spending most of his/her time outside New York.

New York’s “Convenience Rule” provides little relief to telecommuters

New York has an exception to its telecommuter taxation rule for employees that must work outside of their New York location by “necessity” and not just for “convenience.” However, New York State has been notoriously aggressive about taxing non-resident telecommuters and apparently makes it very difficult to prove that telecommuting is a “necessity.”

Potential hidden employer costs as well

Another issue that has garnered little attention in the telecommuting debate is the potential hidden costs to employers.  Sure, employers can eliminate overhead costs and reduce energy costs by encouraging their workers to telecommute, but if an employer allows its workers to telecommute from other states, the employer may be deemed to be operating in all those states as well (for liability and tax purposes.) 

Federal legislation pending to ease telecommuter tax burden

At least as to the issue of the telecommuters' tax burden, there is potential good news in the form of a pending bill entitled Telecommuter Tax Fairness Act of 2009 (HR 2600), introduced last month by Representative James Himes (D – Connecticut). Similar bills were previously introduced in 2005 and 2007, but some believe that the legislative climate is (finally!) just right for such a law.  Stay tuned.