Individual Income Tax Insights: Income Tax Consequences of Nonresident Telecommuting

Home Office

With today’s technology, telecommuting is becoming ever more common. Since 1995, the amount of workers that telecommute has quadrupled, according to an August 2015 Gallup report. Telecommuting can also raise some interesting tax issues when an employee lives in one state and works from home, i.e. telecommutes, some days and physically commutes into the office in another state on others.  

Traditionally, in this situation, states tax a nonresident’s income based on where the employee physically performed the work. Thus, the days the employee worked from home get taxed by his home state, and the days the employee worked in the office are subject to tax in the state in which the office is located. However, some states, including New York, Pennsylvania, Delaware, and Nebraska use a “convenience versus necessity” test in these situations to determine income tax liability.

Under a convenience versus necessity test, the state where the employer is located taxes the employee on all income earned from the employer when the out-of-state work is performed for the employee’s convenience, rather than out of necessity to the employer. This includes even income earned while telecommuting outside of the state. This circumstance can ultimately lead to double taxation for some telecommuting taxpayers.

Take the situation where a taxpayer is employed for a company located in New York and lives in Connecticut. If the taxpayer physically commutes to the office in New York 60 percent of the time, works from home in Connecticut the remaining 40 percent, and does so for his own convenience and not out of necessity to the employer, then he could be subject to double taxation. Because he telecommuted for his own convenience, 100 percent of his income would be subject to New York income tax. Additionally, because Connecticut uses the physical apportionment method, he would also be subject to Connecticut income tax for the 40 percent of the time he physically worked at his home in Connecticut.

States can also make it difficult for a taxpayer to qualify as having to work from home out of necessity, as illustrated by New York income tax TSB-M-06(5)I. For telecommuting to be considered necessary, the memo explains that the home office must contain, or be near, specialized facilities that cannot be made available at the employer’s workplace. If this is not the case, the taxpayer must demonstrate that seven out of 16 specialized factors are met in order to qualify. 

While the convenience versus necessity test may lead to double taxation for employees telecommuting for companies based in New York and Pennsylvania other taxpayers may not have to worry. “I do not see any more states adopting the rule. The states that have these tests are the outliers,” Jonathan Weinberg, Senior Manager at RSM US LLP, told Bloomberg BNA Aug. 7.

This could be due to the cost of administration. “In order to enforce this test, a state would likely have to set up a specific audit program,” he added. Thus, states would have to determine whether the added revenue would offset the administrative cost.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will more states adopt convenience versus necessity tests in an attempt to raise revenue?

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