The Twisted Law That Taxes Telecommuters Twice

Some states make working remotely terribly inconvenient.

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If you think federal tax laws are unfair to transit riders, you're not going to like how a few states treat telecommuters. At least four states — New York, Delaware, Pennsylvania, and Nebraska — have so-called "convenience of the employer" laws that can end up taxing teleworkers twice. Telecommuting law specialist Nicole Belson Golubof recently explained during (you guessed it) a web-conference:

Because telecommuters' home states can also tax the wages earned at home, telecommuters are threatened with double taxation on that income: taxation first by their home states, and then a second time by their employer's state.

Let's take the not-so-hypothetical example of a worker who lives in Connecticut and telecommutes to a job based in New York. We'll call her Connie.

Connie doesn't love driving into New York on congested I-95, and can't always get to the Metro-North station, so twice a week she telecommutes for convenience. Logically, she should pay Connecticut state taxes on income earned those two days, and New York state taxes on income earned the other three. Nope. The "convenience" law means Connie has to pay New York taxes on 100 percent of her salary.

Meanwhile, she still has to pay Connecticut taxes on those two telecommute days per week, so a significant chunk of her income is taxed twice. Doesn't even matter how often Connie telecommutes. If she physically sets foot in her New York office just once a year, she might be subject to this double taxation, according to Belson Golubof.

Now, there are exceptions to the "convenience" law. If a worker telecommutes out of "employer necessity," the rule is waived and double taxation is avoided. Thing is, at least in New York, employer necessity is an extremely difficult thing to prove.

To demonstrate that her telework is an employer necessity, Connie must first show that the work she does on these days is "normal." Sounds simple enough. But a whole slew of tasks that seem to fit that description — including making phone calls, answering emails, reading relevant material, or merely being available at her employer's whim — fail to do so. Rather, the New York law says these tasks do not constitute "performing the usual duties" of a job.

Even if Connie can show her work is normal, she then has to prove that her home office is a "bona fide" workplace. Again, meeting that standard is not nearly as easy as it sounds. The acceptable criteria are too numerous to list in full (see slides 13 through 21 in Belson Golubof's presentation if you're really interested), but suffice it to say few telecommuters could prove their home office a workplace.

So these "convenience" laws present a powerful deterrent to telecommuting. That's bad for everyone involved. The downside for workers is obvious, but the rule is harmful to businesses, too. It means they can't grow their telework program because most employee's will reject it. Even if workers agreed to subject themselves to double taxation, businesses still might not allow telecommuting because it creates addition accounting costs just to figure out what taxes must be withheld where.

The most twisted part of the whole twisted situation is that the "convenience" law harms the very state that imposes it. Employee who drive into work every day rather than telecommute add to traffic in a metro corridor. On the flipside, teleworkers who avoid the rule by never going into the office (an acceptable way to circumvent the law) don't patronize local restaurants, gyms, movie theaters, and other businesses — and thus, in the biggest twist of all, deprive the state of additional tax revenue.

Now, as Belson Golubof points out, there is a bill in Congress that could resolve the situation across the country. The Multi-State Worker Tax Fairness Act — sponsored, no surprise, by several Connecticut lawmakers — was assigned to a committee on February 25. But the bill has tried and failed many times before, and GovTrack gives it only a 2 percent chance of ever being enacted. Telecommuting has been on a steady rise for many years despite these awful "convenience" laws; imagine how much it might grow without them.

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