Unexpected Tax Issues Can Plague Employers Who Allow Employees to Telework Out of State

Here at Gardner Skelton we’ve seen a recent increase in the popularity of telework. Improvements in technology, cloud-based computing, and the near-universal availability of high speed internet make it possible to provide employees with all the work tools they need in their own home. Businesses cut down on expensive office space, and employees skip the long commute. It can be a win-win in the right circumstances.


There is a potential fly in the ointment: business-level state and local taxes (SALT).


Generally, if an employee works in excess of a certain period of time in a particular state, the physical presence of the employee could require the employer to withhold from the employee’s compensation state and unemployment taxes for that state. Depending upon the states involved, the employee may be subject to tax from the state in which they work AND where the employer operates.


The employee’s presence and work in another state may also serve as “nexus” for the employer. That is, the employer may owe a portion of its own income tax to that state. A seemingly expected and reasonable result if an employer actively sends employees and representatives into a state to solicit customers and generate revenue. But, what if the employee works solely from home and does not interact with customers?


As with any state-level tax, uniformity is not guaranteed. Some states look at whether the employee’s activities are intended to develop sales opportunities for the employer, compared to “back office” and administrative work. Others consider where the target customers are located (e.g., employer in State A, employee in State B, customers in State C). A growing consideration is work devoted to technology. A few states believe nexus exists if an employee lives there, works from home, and develops software for the employer (a website) or for sale to customers. A notable decision from New Jersey (Telebright Corp., Inc. v. Dir., N.J. Div. of Taxation, 424 N.J. Super. 384 (March 2, 2012) affirmed assessment of income tax to a Maryland-based business due to one employee working from home in New Jersey helping develop the employer’s web-based products. Even though neither Telebright nor the employee solicited business in New Jersey, the court reasoned that whether the employee worked from a home office or one owned/leased by the employer was “immaterial” for nexus concerns. It further asserted that writing software was the same as building widgets – both are “doing business” in the state. While a few years old, Telebright reflects the increasing attempts by states to expand commercial income taxation.


Employment outside of the office is becoming quite common throughout all industries. Technology advances allow a myriad of working environments to provide businesses, and their employees, the best opportunities for financial and personal success. More and more companies employ folks all over the country (if not the world – a discussion for another time). Employees move from state to state for all sorts of reasons, yet may continue working for their company. While mobility and flexibility are overall positive evolutions to the workforce and workplace, be mindful of the tax compliance issues that may result.


For more information or help with your business tax needs, contact Fred Parker.