Two-Timing Telecommute Taxes

Telecommuting — or telework — is a critical tool that can help employees, businesses and communities weather the current financial crisis, and thrive afterward. However, right now, the nation is burdened with a powerful threat to the growth of telework: the telecommuter tax. This tax is a state penalty imposed on Americans who work for employers outside their home states and sometimes telecommute.

Proposed bi-partisan federal legislation called the Telecommuter Tax Fairness Act would abolish the telecommuter tax. To help assure that the nation can take full advantage of the economic relief telework offers, Congress must pass this bill – either as stand-alone legislation or as part of a new economic stimulus package.

Relief for Employees

Working from home (or alternative sites close to home) can save struggling families money on gasoline, parking, train and bus fares, dry cleaning, business wardrobes and work-week meals. They can save on dependent care by providing some of the necessary care themselves during the time they previously spent commuting.

Telework can also relieve the considerable strain on Americans nearing retirement who have unexpectedly lost their pensions and must now continue working. Working indefinitely may be a hardship for many older employees. Some may not be able, physically, to continue making a daily round-trip commute. Some may need to move closer to their adult children who live out-of-state, either to receive physical help from them, or to help them with child-care costs by baby-sitting. If Americans who have been robbed of their retirements can work from home at least some of the time, they can stay on the job without having to travel as often or live as close to their offices.

Relief for Employers

Employers (both public and private) can use telework to slash real estate and energy expenses. When fewer employees work on-site every day, employers need to rent, heat, cool and light less office space.

Implementing telework can also reduce recruitment and turnover costs: Employers offering flexibility can attract top-tier candidates from a wide geographic area, and generate loyalty among valued employees.

Telework can reduce business interruption costs when an emergency or other major disruption occurs near the main office. If, for example, a severe storm, fire, bomb threat or transit strike affects the employer’s area, a staff trained to work remotely can keep operations running smoothly.

And organizations adopting telework can become more productive. Employees can replace commute time with work time; concentrate better because they are less exposed to the frequent interruptions typical in busy offices; reduce absenteeism by completing tasks at home instead of taking whole days off when they have to meet non-work responsibilities, like caring for sick children, and reduce “presenteeism”, the phenomenon of employees showing up at the office when they are too sick to be productive and are likely to compromise the health and productivity of co-workers.

Relief for Communities

Telework can bring new Internet-based jobs to rural areas with sagging economies. It can also bring new home buyers to such regions: Americans who want to maintain their high paced, big-city careers in a slower paced, more scenic environment. A significant growth in the population of home-based workers in these communities can also produce growth in businesses catering to their needs, such as home office supply stores and business service providers.

The Telecommuter Penalty Tax

Despite the important help telework can provide during and after the financial meltdown, states may punish nonresident teleworkers by subjecting them to a telecommuter tax. New York has been particularly aggressive on this front.

Under the “convenience of the employer” rule, when a nonresident of New York and his New York employer agree that the employee may sometimes work from home, New York will tax him on his entire income, both the income he earns when he works in New York, and the income he earns when he works at home, in a different state. Because telecommuters’ home states can also tax the wages telecommuters earn at home, they are taxed twice on those wages.

In some cases, a telecommuter’s home state may give him a credit for the taxes he pays New York on the income he earns at home. However, even in such cases, the employee may be penalized for telecommuting. When New York taxes income at a higher rate than the home state, the telecommuter must pay taxes on his home state income at the higher rate.

By subjecting nonresident employees to double or excessive taxation if they telecommute, a state like New York needlessly limits the strategies available for coping with our ailing economy.

Harm to Employers

By deterring telework, the telecommuter tax frustrates businesses trying to decentralize their workers and prevents them from exploiting telework’s business benefits.

In addition, the hefty payroll obligations the telecommuter tax imposes on businesses can force companies to relocate. Indeed, The New York Times reported this year on a small business that planned to leave New York because tackling the state's claims under the convenience of the employer rule proved too draining. (See David S. Joachim, "Telecommuters Cry 'Ouch' to the Tax Gods," The New York Times, Special Section on Small Business, Feb. 20, 2008.)

Further, by thwarting the growth of telework, the telecommuter tax encourages traffic congestion, a menace to productivity. Excessive traffic can, for example, cause employees to arrive late for work and delay customer deliveries.

Harm to States

In addition to employees and employers, telecommuters' states of residence also suffer under the telecommuter tax. Consider a Virginia resident who telecommutes most of the time to his New York employer. If Virginia grants the telecommuter a credit for taxes paid to New York on his home state income, Virginia forfeits its tax revenue to New York. In so doing, Virginia effectively subsidizes public services in New York (like transportation, police, fire and other emergency services) while it makes the same services available to its resident who is working in Virginia. States currently struggling with steep budgetary shortfalls cannot afford to cede their own revenue to other states. The employee who telecommutes, meanwhile, suffers under a reduced budget for home state spending.

Even the state imposing the tax loses. In addition to driving business away, New York’s telework tax policy can drive part-time telecommuters away. Because the convenience of the employer rule applies only to nonresidents who spend time working in New York, nonresidents can avoid the rule by avoiding the state: They can increase their telecommuting from part-time to full-time, or take jobs in their home states. When nonresidents stop traveling to New York for work, New York gives up the opportunity to tax any of their wages, and New York restaurants, hotels and other businesses lose the income these teleworkers would have generated on their commuting days.

The Remedy

The Telecommuter Tax Fairness Act would eliminate these ills, prohibiting states like New York from taxing the income nonresidents earn at home in other states.

The bill has bi-partisan support in both Houses of Congress, including the support of lawmakers from Connecticut, Maine, Mississippi and Virginia. Outside Congress, the measure has been endorsed by advocates for telecommuters, taxpayers, homeowners and small businesses.

To help assure that the greatest number of employees and businesses can maximize telework’s economic benefits – during the current crisis and afterward – Congress should pass the Telecommuter Tax Fairness Act. Whether as an addition to a new stimulus package or in a separate measure, Washington must see to it that telecommuter tax fairness becomes the law.

by Nicole Belson Goluboff 11/09/2008