Taxing Telecommuters

The US Supreme Court has declined to review a case in which a telecommuter was required to pay income tax to New York State while living in Tennessee.

Telecommuting is work that is performed at an employee’s home or away from a traditional office setting.

While the idea has not gained widespread acceptance in the federal government, the subject has gained attention in recent months as the cost of gas and commuting costs generally have zoomed up. There are reportedly some 45.1 million teleworkers now in the United States.

There are certainly advantages to telecommuting including reduced commuting costs, the possibility of reducing traffic congestion, appeal when recruiting new employees and possibily less office space required to house office workers. The project could also allow people living in more rural areas to work in or near their homes. (See GAO Looks At Telework And Agency Location.) OPM has even set up a portion of its web site devoted to telecommuting.

But there are also reasons telecommuting has not been enthusiastically embraced. A supervisor will have more work in keeping up with an employee’s work; lack of interaction between the employee working at home and the rest of the staff and feelings of isolation on the part of the telecommuter can all play a role.

But here is a new twist that you may not have thought about before: taxes.

Most of us don’t make major decisions based solely on the tax implications but a new twist may be evolving for those who want to telecommute.

A move by the US Supreme Court may have an impact on the income tax bills for people who want to become telecommuters.

Here’s why. A man living in Nashville, Tennessee telecommuted to New York. Tennessee does not have an income tax. New York does have one.

The telecommuter was charged by New York State for income taxes on all of his income–even though he lived and worked in Tennessee. The highest court in New York concluded that the Tennessee resident owed the income taxes to the state. The Supreme Court declined to accept an appeal so the New York court decision stands. (See Matter of Huckaby v. New York State Division of Tax Appeals)

This decision would not have an immediate impact on most people who are telecommuters. The New York State law is different than in most states because it says that income from work performed out of state is taxable by New York unless it is done for the employer’s “necessity.”

In this case, the telecommuter living in Tennessee lived there for personal reasons–and perhaps because of the lower taxes, less pollution, less congestion or because he wanted to living near friends and relatives. In any case, he now has to pay the higher New York taxes even though he is not using the services of the government there.

Most states do not now have a law such as the one at issue in New York. There is little doubt though that many jurisdictions would love to have a bite of the income that flows out of one state and into another. For example, some federal employees would probably work at home in Northern Virginia while their agency is located in the District of Columbia. Or perhaps some employees would live near a Florida beach (another state with no income tax) even their agency is located in Washington, DC. This would leave open the possibility of the District of Columbia passing a law similar to that of New York and an opportunity to bring more money into the maw of the DC government.

As telecommuting becomes more popular, pressure may increase on Congress to take action. There is already proposed legislation called the “Telecommuter Tax Fairness Act” which would prevent states from collecting taxes from employees for work performed outside the state.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47