State Taxation of Telecommuters


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, § 601(e), 20 NYCRR 132.18). Pennsylvania, Nebraska, Delaware and New Jersey have similar allocation laws, rules 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 rules.



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 rule 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. Zelinsky argued that the arrangement subjected him to double state taxation, since Connecticut allows only a partial tax credit for days worked in New York. The U.S. Supreme Court declined to hear his due process claim.



For taxpayers like Huckaby or Zelinsky, New York in 2006 described how a nonresident telecommuter could meet the necessity rule in either of two ways (N.Y. State Department of Taxation and Finance, Memo TSB-M-06(5)I).


1. The telecommuter may meet a single criterion (“primary factor”). If the employee maintains a home office in another state that contains or is near “special facilities” that are not or cannot be made available at or near the New York employer’s place of business, wages earned during days worked from the home office are not taxed by New York. The memo gives as an example an automotive test track. The facility need not be permanent; scientific equipment at or near the employee’s home would also qualify as a special facility, but only if it could not be set up at the New York employer’s place of business.


2. Alternately, employees can meet a combination of any four out of six “secondary factors,” plus any three out of 10 “other factors.”


Secondary factors (four required):

  1. The home office is a requirement or condition of employment.
  2. The employer has a bona fide business purpose for the employee’s home office location.
  3. The employee performs some of the core duties of his or her employment at the home office.
  4. The employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office.
  5. The employer does not provide the employee with designated office space or other regular work accommodations at any regular place of business.
  6. The employer reimburses the employee for substantially all home office expenses (or pays for all supplies and equipment plus fair rental value of the office).

Other factors (three required):

  1. The employer maintains a separate telephone line and listing
  2. for the home office.
  3. The employee’s home office address and phone number are listed on the employer’s business letterhead or business cards.
  4. The home office is used exclusively for business of the employer.
  5. If the employer’s business is selling products, the employee keeps a supply of products or samples in the home office.
  6. Business records of the employer are stored in the home office.
  7. The home office has a sign designating it as a place of business of the employer.
  8. The home office is identified in advertising as a place of business of the employer.
  9. The home office is covered by a business insurance policy or rider to the employee’s homeowner’s policy.
  10. The employee correctly claims a federal income tax deduction for use of the home office.
  11. The employee is not an officer of the company.

It’s not clear by what criteria Pennsylvania, Delaware, New Jersey and Nebraska might apply their necessity rules. Advocates of telecommuting, pointing to its obvious benefits, have pushed for federal legislation, and a bill to require physical presence was introduced in the last Congress (HR 1360 and S 785, the Telecommuter Tax Fairness Act of 2007). At any rate, CPAs with clients who work from home and could be doing work for employers in those states or especially New York should advise those clients of the necessity requirement.


By C. Andrew Lafond, assistant professor, Philadelphia University, Philadelphia, and Jeffrey J. Schrader, CPA, shareholder in Jeffrey J. Schrader, CPA, PC, Trenton, N.J. Their e-mail addresses, respectively, are and .


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