Telecommuting has grown exponentially in the last few years. The number of employees working remotely at least one day per week rose 74% from 2005 to 2008,2 with 20 to 30 million doing so in 2008. Recently the U.S. Senate unanimously passed the 2010 Telework Enhancement Act to expand telecommuting opportunities for federal employees.3 A white paper issued collaboratively by the U.S. General Services Administration and Telework Exchange, a public-private partnership, set out some of the benefits of telecommuting, including: reduction of carbon emissions due to decreased vehicle use; increase of employee morale and decrease of stress; accommodation of employees with disabilities and those with family care issues; reduction of office space needs and operating costs; and continuity of operations during emergency situations (e.g., terrorist attack, pandemic influenza, natural disaster).4 State and local governmental agencies are also recognizing the need for and implementing telecommuting programs.5 By one estimate, if 33 million Americans were to telecommute, oil imports would decrease by between 24% and 48%, greenhouse gases would be reduced by up to 67 million metric tons per year, and as much as 7.5 trillion fewer gallons of oil would be consumed per year.6  

Despite the burgeoning telecommuting workforce in government and private industry, and the clear imperative supporting the institution of broadbased telework programs, state and local income tax laws and withholding tax provisions remain muddled and inconsistent and, when employers and employees are not careful, risk placing telecommuters and their employers at a considerable disadvantage from a state and local tax perspective.  


No good deed goes unpunished. An employer that allows its employees to telecommute and perform work in a state in which it does not already have nexus, i.e., does not have a sufficient connection with that state to allow the state to assert tax jurisdiction under the U.S. Constitution, could find itself subject to income tax and responsible for the collection of sales tax (to name just a couple of the potential tax obligations a state could assert) in the state from which the employee telecommutes.  

Recently, the New Jersey Tax Court ruled that a software developer that “regularly and consistently permits” an employee to work from her home in New Jersey is doing business in the state and is subject to New Jersey’s corporation business tax.7 The court concluded that a corporation is “‘doing business’ at the place where its employees are expected to report for work, where they are regularly receiving and carrying out their assignments, where those employees are supervised, where they begin and end their work day, and where they deliver to their employer and customers a finished work product.”8 The court also noted that because the employee used a laptop provided by the employer, the company also employed property in the state, which “bolster[ed]” the conclusion that the company was doing business in, and was therefore taxable in, New Jersey. The court rejected the company’s challenge under the Due Process Clause of the U.S. Constitution, holding that the company had “fair warning” that it could be subject to New Jersey law because of its employment relationship with an individual working for it in New Jersey. Also rejected by the court was the company’s claim that the daily presence of the employee in the State failed to satisfy the “substantial nexus” requirement of the Commerce Clause.  

As the New Jersey Tax Court cautioned: “[I]t is for the taxpayer to make its business decisions in light of tax statutes, rather than the other way around. . . . That [the company] may not have realized the State tax consequences of its business decisions regarding the employment of [the telecommuting employee] does not insulate the company from corporate tax liability.”9  

Unfortunately, once a corporate toe has been dipped in state waters, it’s not just the toe that gets taxed. States have aggressively pursued tax policies intended to grab the maximum amount of tax revenues from those with the least connection to the state, thereby exporting tax burdens. Employers should therefore evaluate the implications of telecommuting before approving telecommuting requests of their employees.

Personal Tax Liability and Tax Withholding

An employee’s decision to telecommute can also have significant, unintended state income tax implications for the employee. Individuals are generally subject to tax on all of their income by their state of residence, regardless of where that income is earned. In addition, most states that impose a personal income tax also provide that even a single visit to the state by a nonresident is sufficient to subject that employee to tax by the nonresident state.10 Although most states provide a credit for personal income taxes paid to another state, such credit mechanism has been found not to be required under the U.S. Constitution,11 leaving the potential for double taxation a real and serious problem.  

A byzantine labyrinth of state rules—that may or may not be tied to the employee’s personal income taxability threshold— exists with respect to employers’ withholding obligations. For example, in at least a couple of states, even though nonresidents are subject to income tax based on a single day’s presence, employers are not required to withhold unless an employee is present for at least fourteen days.12 In many states, the withholding obligation starts the first day the employee travels to the state,13 while in other states the employee’s earnings attributable to the state must exceed a certain wage threshold, and yet other states use an alternative of number of days or dollar threshold.14 Even where a day threshold is adopted, the determination of what constitutes a day is not always clear: Does traveling through a state count? Does a portion of the day count? Implementing a tracking system for employees is essential, but even with such a system in place difficulties in administration exist. Certain states have reciprocal agreements with other states that allow an employer to withhold income taxes in the employee’s state of residence irrespective of where the employee performs those services, which can help reduce an employer’s burden.  

For employees who are telecommuting and performing services in multiple states, ensuring that the employer withholds and remits taxes to the appropriate jurisdictions can also be a challenge. Generally, an employer is only required to withhold and remit taxes in the jurisdictions in which it does business, but its employees may be telecommuting from and providing services in jurisdictions in which the employer maintains that it is not doing business (notwithstanding the potential nexus issues discussed above). Some states authorize an employer to deduct and remit withholding taxes to the state of a nonresident employee if the employee provides written authorization.15 However, if a telecommuting employee has income tax obligations to multiple jurisdictions, not all states provide an easy mechanism for a nonresident to direct the employer to limit withholding based on the portion of services rendered in-state.16  

Further complicating personal income tax and withholding are issues such as New York’s “convenience of the employer” rule.17 New York’s rule provides that days spent by a New York State’s nonresident employed to provide services in New York, but who works at home outside the state, are to be sourced to the New York office, unless such work was performed outside the New York office for the necessity of the employer rather than the employee’s convenience.18 New York courts have consistently rejected challenges to the “convenience of the employer” rule.19 The States’ basis for the convenience of the employer rule is that in the absence of such a rule, in-state and out-of-state employees would not be on a level playing field; residents would not be able to exclude income attributable to the work they perform in their homes while nonresidents would be able to do so.  

Recently, an administrative law judge rejected New York State’s assertion of tax against a software consultant and programmer, and recognized that even the “convenience of the employer” rule has its limits.20 The individual was a New Jersey resident who worked exclusively in and reported all of his wages to New Jersey. His employer was an Illinoisbased company with a one-room office in New York City. The individual did not, however, ever work from the New York City office, and on those facts the administrative law judge held no New York tax was due. While the proper result was reached here, the assertion of a liability under this factual scenario is a potent reminder that state tax issues can arise even when an employee has only the most tenuous connections to a state.  

The welter of rules, exceptions to rules, and nuances to rules can place a significant withholding compliance burden on companies. Telecommuting employees are at risk for tax assertions by the jurisdictions to which they have traveled or from which they have performed services. In the current economic environment, the quest for tax dollars (particularly from non-voters) has increased and states’ enforcement of nexus and withholding rules has likewise increased.  

Employers will also need to determine the jurisdiction of employment for telecommuting employees for unemployment insurance purposes. Under the definition of “employment” adopted by most states, employment by a single employer of an employee performing services in multiple states is not to be fragmented, but should be allocated to the state where the employee is most likely to become unemployed and seek work. States apply the following successive tests to determine the state of coverage: (1) localization of employee’s services; (2) employee’s base of operations; (3) place of employer’s direction and control of employee; and (4) residence. Under such a statute, only if none of these tests results in the services being attributed to a single state will split coverage be allowed.21  

New York’s highest court applied that definition to an employee telecommuting from Florida who performed services for a New York State-based corporation.22 The court held that the telecommuter was localized in Florida where she was physically present and therefore Florida, not New York State, was responsible for the payment of unemployment insurance benefits. However, when a telecommuter performs services in multiple jurisdictions and is not localized to a single jurisdiction, it is unclear how the uniform rule will be applied by state labor departments and courts.  

Federal Intervention

In response to increased audit activity over the last few years, business groups have advanced federal legislation to prohibit states’ use of the “convenience of the employer rule” and to provide a uniform threshold before employers that would be required to withhold taxes.  

In August 2004, the Telecommuter Tax Fairness Act23 was first proposed. It would bar the “convenience of the employer rule” and require that an employee be physically present in the state as a precondition to imposition of tax on that worker. The legislation was most recently reintroduced in May 2009.24  

First introduced in 2006,25 and reintroduced most recently in 2009, is the Mobile Workforce State Income Tax Fairness and Simplification Act. This legislation would address the taxation of nonresident employees (with the exclusion of professional athletes, professional entertainers, and certain public figures) and would set a threshold of days below which a state could not subject the nonresident to state income tax. Although the initial bills had proposed a sixty-day threshold, due to state clamor a compromise was reached between employers and states and, in the most recent iteration of the bill, a thirty-day threshold was proposed.26  

The Multistate Tax Commission (“MTC”), an organization that represents states’ tax interests, has proposed a Mobile Workforce Withholding and Individual Income Tax model statute that would decrease the threshold to twenty days. The MTC’s model statute provides that a nonresident’s income from work performed in the state of nonresidence would be exempt from withholding if the nonresident: (a) has no income derived from the nonresident state; (b) worked fewer than twenty days in that state (days in transit would be exempt from the day count); and (c) resides in a state that has a reciprocal exemption or does not impose a personal income tax. The MTC’s model statute takes a broader view than most states do of the types of individuals excluded from the withholding protection: professional athletes, persons of prominence who perform services on a per-event basis, professional entertainers, construction laborers, and key employees. Qualifying employees would not have a filing requirement in the state of nonresidence and employers would not have a withholding requirement with respect to qualifying employees. However, the model act does not explicitly address nexus issues. At least one state, Montana, has criticized the MTC’s model statute and the “working presence test” as creating complexity in states that have an income threshold for taxability, even claiming that nonresidents working fewer than twenty days could receive “special, favorable tax treatment” since a nonresident high-earner would be “excused” from filing returns while a resident with lower income would need to file.27

Although states take umbrage at the potential incursion on their sovereign immunity by Congress, the patchwork of disparate rules and the considerable compliance burdens decrease the competitiveness of companies in the worldwide marketplace and warrant federal intervention under the Commerce and Foreign Commerce Clauses to ensure that interstate and foreign commerce is not unduly impeded by a myriad of state and local rules. With the explosive expansion of technology facilitating telecommuting, and the environmental, societal, and security concerns addressed by telecommuting, Congressional action is sorely needed. In the meantime, employers and employees alike need to consider the state tax implications of telecommuting arrangements, and plan ahead to avoid unexpected assertions of nexus and withholding duties for the employer and personal income tax issues for the employee.