Beware Unexpected Tax Consequences from Telecommuting
Mary worked for IT, Inc. at its headquarters in Maryland. Her husband moved to New Jersey for his work and Mary moved with him. Mary continued to work for IT, Inc., writing computer code from her home in New Jersey and uploading her work to her co-workers in Maryland via the Internet. IT, Inc. withheld New Jersey income taxes from her pay and filed appropriate employment tax returns in New Jersey.
The problem? By employing one telecommuter in New Jersey, IT, Inc. is now doing business in New Jersey and is liable for New Jersey franchise (income) taxes. That was the decision of the New Jersey Superior Court in Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation.
Most employers with a single telecommuting employee in a state do not expect to have to pay corporate income taxes to that state – but they might be required to do so. They might also be required to pay unemployment compensation and workers compensation in the state where the employee is located and to follow the employment laws of that state with respect to that employee. The compensation and benefits twist: In addition to following the correct payroll and wage and hour requirements of the state where the employee lives, the employer should also check that the insurers of any insured benefit plans (e.g., life, health, dental, long term disability, etc.) know that there is an employee in another state and that state insurance laws allow the insurer to cover that employee.
Employers contemplating telecommuting arrangements with employees in other states should think through all the ramifications before agreeing to the relationship. They should think even harder if the employee is in another country. In some cases, the benefits of a single employee’s services may not outweigh the compliance and tax headaches that those services carry with them.
Contact Benefits Notes for more information.