The tax issues related to individuals who telecommute (work from their home for their employer) are complex. This posting addresses the tax issues associated with employees who telecommute, not those who work from home as independent contractors. If the telecommuter is an independent contractor, then the worker is responsible for remitting his own self-employment taxes (FICA & Medicare), pays for his own insurance and benefits, and is not entitled to any employer-provided benefits (health care, retirement, etc.).
Thus an important consideration is whether the person working at home is classified as an employee or independent contractor. For most workers, this classification depends on the common law rules which primarily focus on the behavioral and financial controls that the recipient of the services has over the worker. We have addressed the differences between an employee and independent contractor in blog postings dated Feb. 15, 2015, Mar. 4, 2014, Sept. 10, 2013, Oct. 15, 2012 and Aug. 19, 2011. Needless to say, you can refer to these earlier posts to better understand this issue.
Telecommuting may create unintended state income tax consequences for the employee. For example, if the employee is occasionally required to report to the employer’s office which is located in another state, that state may tax the employee on 100% of the compensation paid to that employee. These states take the position that the employee is directed from the employer’s base of operations, and thus works in the employer’s state 100% of the time. If the employee’s state of residence allows an income tax credit for taxes paid to other states, then the employee’s out-of-pocket tax cost will likely be restricted to the amount by which the non-resident state’s individual tax rate exceeds that of the residence state. For example, if a PA-resident employee earns $100,000 and is taxed in a state with a 10% income tax rate, the employee will be out of pocket by $693 (the difference between the $1,000 paid to the non-resident state and the $307 tax credit allowed by PA at its 3.07% tax rate).
Other states may tax the employee only for the days spent in its state. Thus if the employee above works 200 days of the year and spends 4 days at the employer’s headquarters, the employer would be required to withhold taxes on $2,000 ($100,000 divided by 200 work days in a year X 4 days working in that state).
There are also states that tax an employee only if the number of days spent in the state exceeds a certain threshold. For example, if the state’s threshold is that an employer is required to withhold taxes on any employee who works in the state for five or more days, the person who only worked 4 days would not have any wages reported to the employer’s state.
The take-away from this is that the employee must converse with the employer to understand which taxes will be withheld by the employer and what the employee’s potential additional tax liability may be.
Employers are not immune from the complexities of telecommuting employees. It is possible, depending upon the state in which the employee resides, that the employer will be subject to corporate income taxes and employment taxes in the employee’s resident state. In addition, the employer may have to charge sales tax on products sold to customers in the employee’s resident state. States have become more aggressive about luring out-of-state companies into its tax web as discussed in our July 15, 2014 blog posting. Employers who employ telecommuters need to consult with their tax professional.
If you want to learn more about employee versus independent contractor and if your company has nexus by using telecommuting employees, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
