State Taxation of Telecommuters

By Lafond, Andrew C.; Schrader, Jeffrey J. | Journal of Accountancy, June 2009 | Go to article overview

State Taxation of Telecommuters

Lafond, Andrew C., Schrader, Jeffrey J., Journal of Accountancy

Walk into any office today--not just late on a Friday afternoon--and you might wonder where all the workers are. Most likely, they're telecommuting, from home or anyplace they can plug in or catch a wireless signal and log on--and for a lot of good reasons. Employers don't have to provide chairs, desks or parking spaces. Employees don't have to ride a bus or train or fight snarled traffic. In fact, they might not have to be in the same city or even the same state.

But as it grows in feasibility and popularity, telecommuting across state lines could subject your clients to some ugly income tax surprises. New York state taxes all New York-source salary and wage income of nonresident employees when the arrangement is for convenience rather than by necessity (Laws of New York, [section] 601(e), 20 NYCRR 132.18). Pennsylvania, Nebraska, Delaware and New Jersey have similar allocation laws, roles or policies. The rest of the states and the District of Columbia either don't tax wage or salary income or, for nonresidents, allocate to themselves wage or salary income only when it is paid for services performed within their borders (physical presence).

In our survey of taxing authority officials in all 50 states and the District of Columbia, those of one, Oregon, said they're considering adopting a convenience vs. necessity rule. As long-distance telecommuting increases and revenue-starved states look for more ways to increase income taxes, still more states may join in allocating wages of nonresident telecommuters.

What do states mean by convenience vs. necessity? First, it might help to describe the more customary roles.


Under the physical-presence method of allocation followed by 36 of the 41 states that tax wages, an employee's wages for personal services are allocated based on where the services are rendered. If these services were performed in more than one state, the wages usually are divided by the proportion of normal work days the employee performed the services in each state. For example, a South Dakota resident working for an Iowa employer is subject to Iowa personal income taxes only on the portion of wages received for work performed while the employee is in Iowa. If the employee who works five days a week worked two days a week at the employer's Iowa office and three days a week at his South Dakota home, he or she would be subject to Iowa income tax on 40% of wages earned (see Memorandum 00201113, Iowa Department of Revenue, April 12, 2000).


In New York, Pennsylvania, Delaware, New Jersey and Nebraska, however, all wages earned from an employer in any of those states are allocated to that state unless by necessity the nonresident's work must be performed from his or her out-of-state location. This role has been enforced by the taxing authority in New York, legally challenged and upheld.

In Huckaby v. New York State Division of Tax Appeals (04-1734), a New York state court found Thomas L. Huckaby liable for taxes on wages he earned from a New York employer while working from his home in Tennessee, which has no individual income tax on wages. Although Huckaby, a computer programmer, worked some days in his employer's New York office, he admitted he worked from home most of the time for personal reasons. The New York Court of Appeals, the state's highest court, upheld the decision. To be exempt from New York taxation, such wages must entail "duties ... which by their very nature, cannot be performed at the employer's place of business," the court said.

Earlier, in Zelinsky v. New York State Tax Appeals Tribunal (769 N.Y.S.2d 464 (2003), cert. denied, 541 U.S. 1009 (2004)), another New York court held that Edward A. Zelinsky, a tax law professor at a New York university who worked partly from his Connecticut home, was required to pay New York tax on his entire New York university salary. The work he performed at home was "inextricably intertwined" with his professional duties performed in New York, the court said. …

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