Telecommuter Taxes On the Rise in the States

January 31, 2006

Telecommuters working from home are increasingly getting a nasty surprise at tax time: they may be subject to income taxes on more than 100 percent of their income.

The reason? Telecommuters are increasingly being taxed not only by their home state, but by states where their employers are located. An inconsistent patchwork of state tax laws has led to a flood of legal cases in recent years in which multiple jurisdictions have battled for taxing authority over a single taxpayer’s income.

We’ve just released a new analysis of the trend toward multiple states taxing telecommuters. Here’s from the news release:

“The growing practice of multiple states taxing the income of telecommuters acts as a direct financial disincentive for employers and employees to use telecommuting,” said Tax Foundation Staff Attorney Chris Atkins, author of the new analysis. “Thanks to inconsistent state tax laws, those working electronically from home often face taxation on more than 100 percent of their income.”

Workers who live and work in multiple states have traditionally paid income taxes in each state. But in recent years the practice of taxing income of non-residents has been extended to those who work electronically from out-of-state homes, but who but never physically enter a state.

The analysis argues that taxing non-resident telecommuters often violates the “benefit principle” of taxation, which says a state should tax income only to the extent that the taxpayer benefits from services provided by the state.

“Telecommuters primarily benefit from roads, schools and police in their home states, not in states to which they send emails, faxes and make phone calls when working from home,” said Atkins. “States should only tax the income of telecommuting workers based on the time they are physically present in the state, not virtually present.”

The study examines the Telecommuter Tax Fairness Act of 2005—a bill originally introduced by Senators Dodd (D-CT) and Lieberman (D-CT) in the Senate (S. 1097) and Representative Christopher Shays (R-CT) in the House (H.R. 2558)—as a federal solution to the current patchwork of state tax laws affecting telecommuters.

“The Telecommuter Tax Fairness Act of 2005 would allow states to tax only their fair share of a telecommuter’s income,” said Atkins. “This would protect telecommuters from double taxation, and simplify the tax system for their employers.”

Click here to read the full analysis.


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