Every week when AccountingWEB distributes our e-newsletters, we receive a number of automatic “out-of-office” replies. That’s no surprise. After all, summer is a great time to travel and whether you are calling on clients, making the rounds of all the offices, attending a conference, spending more time with your family or work remotely regularly, getting out of the office even for a few days can help recharge our batteries and refocus our energy. It can also raise some interesting tax questions.
Telework and telecommuting are becoming more common in the American business world. An estimated 24 million Americans employees, or more than 18 percent of the adult workforce, telecommuted at least one day during 2004 according to the International Telework Association and Council (ITAC). Another estimated 20 million self-employed individuals also telework on a full- or part-time basis. Telework is broadly defined as working at home, at a client’s location, in a satellite office, at a telework center or on the road.
Most telecommuters pay taxes in the state where the work is performed. In the past, this was commonly, but not always, the same, state the office was in. The proliferation of the Internet and the rise of global businesses mean that this is not necessarily the case any more. Some employees, particularly those whose office is in one state but live, or work at client sites, in another state (or country), may owe taxes in all the states (or countries) in which they work. In addition, the company may owe also owe taxes in states (and countries) in which telecommuting employees live or work at client sites, even if the company does not have an office there. Companies may also find they are subject to use and sales tax laws in such states too.
Of course, different states (or countries) have different tax laws. According to a 2001 report from the General Accounting Office (GAO), the patchwork of state tax laws is a significant barrier to telecommuting. In an effort to eliminate this barrier, Senator Chris Dodd and Representative Christopher Shays introduced “The Telecommuter Tax Fairness Act of 2005” in both houses of Congress last month. The Act would amend title 4 of the United States Code to prohibit the double taxation of telecommuters and others working from home. The “Parents’ Tax Relief Act of 2005”, introduced last Thursday, June 23, 2005, to the Senate, contains a Telecommuting Tax Credit to help encourage and support parents working from home, as well.
Individuals working in locations in multiple states or who travel extensively can present employers with significant withholding challenges. Before engaging in such complex work arrangements, companies should have systems in place that help them determine the taxable income earned by the employee in a specific state. Electronic time-reporting systems that require the employee to input their work location every day as especially helpful in the timely registering and remitting of these tax obligations.
The type of work being done by the telecommuter is also important. The Tax Advisor reports that while the very presence of a telecommuter in a state may be enough to create a tax obligation for a company, under P.L. 86-272, states are prohibited from imposing income taxes when the employee’s only activity is soliciting orders for sales of tangible personal property sent outside the state and filled from supplies housed outside the state. Further, if the telecommuter may create a business nexus by engaging in:
- Making repairs or installations
- Providing technical assistance
- Training customers
- Maintaining an office other than a home office or
- Publicly attributing a home office as a place of business through advertising or marketing materials
The presence of a nexus, defined as a minimum connection between the state and the telecommuter, property or transaction, means the company is not protected by P.L. 86-272 and should file income tax returns.
Along with income tax, companies may find they need to remit unemployment insurance payments to the state. Unlike income taxes, which both the employer and employee can owe in multiple states, unemployment insurance payment are generally only collected in the state in which the employee is most likely to look for a job, should they become unemployed. If the employee resides in a state other than the state occupied by the company, the company may find it must make unemployment insurance payments in both states.
Businesses employing sales telecommuters may also be subject to sales and use taxes in the state where the employee works. Tangible products are usually taxed where they are put in use. However, because the penalties for failure to comply with sales and use tax laws can leave the company liable for unpaid taxes penalties and interest, so businesses want to be very careful in assuring they are in compliance with sale sand use tax laws in every state in which they employ a telecommuter.
The increasing popularity of telecommuting indicates that these and other tax issues will only become more important in the future. Regardless of why individuals work away from the office, careful planning on both the individual and company level will help assure that everyone understands and complies with applicable tax laws.