Interstate telecommuting can cause tax concerns, too

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Here on WebWorkerDaily, we’ve recently covered some of the tricky tax situations web workers can get themselves into when working across international borders, offering news and tips to help. But even if you’ve dodged one bullet by keeping your business confined to the U.S., apparently you may not necessarily be in the clear with the IRS.

In a recent article that will be of definite interest to any manager of a remote team with members telecommuting across state lines, the Wall Street Journal warned that having an office in, say, Connecticut, and a web worker in your employ based in New York, can cause tax headaches. The article states:

If you let employees telecommute from out of state, you may face tax trouble.

Matthew Bobman, a certified public accountant in New York City, warns that companies have been found liable for state corporate tax “when the only connection to that state was that they had an employee telecommuting in that state.”

In March 2010, for instance, the Tax Court of New Jersey ruled that a company whose main offices are in Maryland was “doing business” in New Jersey because an employee telecommutes from there…. Just how much of a tax hit companies face depends on state rules. Some impose income tax based on an out-of-state company’s sales in the jurisdiction. Others also take into account the company’s payroll and property in the state. However they figure the bill, lots of states seem to be on the same page as New Jersey. In a survey issued in April, 35 states, the District of Columbia and New York City said an employee who telecommutes from a home in the state would create “nexus”–a connection that warrants imposing income tax on an out-of-state employer.

If you’re facing this issue, the WSJ offers a possible solution: “Have the telecommuting employee resign, form a C or S corporation and invoice the ex-employer for work. But… the former employer would have to pay the former employee more to cover new expenses and lost benefits.” Check out the complete article for more details.

Has your company faced any tax headaches because of telecommuting out-of-state employees?

Image courtesy Flickr user jczart

1 Comment

Arjen Lentz

My business mainly has people working in/from other countries – all telecommuting. The business is based in Australia, and it’s workable when dealing with contractors. As employees it would get a bit more complicated, but it’s still doable.

What I have found though while exploring the possibility of opening a US branch earlier, is that the US is an administrative nightmare at the very least, so that’s costly even if the a state or federal tax department doesn’t demand an extra slice. The US has more bureaucracy with fewer net benefits than any other country I’ve worked with. Somewhat ironic?

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