Imagine this scenario: One of your employees announces he’s getting married in a few months and moving to another state. He’s a valuable software developer who works alone from his home most of the time anyway, so why not just let him telecommute from his new home 1,000 miles away? Not only will it allow you to retain an incredibly talented employee, but it will also likely save you money on overhead and other expenses. Sounds like a great deal, right?
Not so fast.
While many employers have policies which permit employees to work from home under certain conditions, allowing employees to work from home in other states could be costlier than you think. In 2010, a New Jersey court held that an out-of-state employer owed New Jersey corporate business taxes because of the company’s “nexus” with the state. That “nexus” — the link which caused the state to reach into the company’s corporate tax pockets — was a company employee who worked from her home in New Jersey. In fact, that was the only link. The company had no business operations or other connections with the state other than that employee.
While employers shouldn’t rush to retract their work-from-home policies based on this one case, they should be aware of the potential added costs associated with multistate telecommuting. To date, only six states have clearly stated that the presence (or residence) of telecommuting employees wouldn’t give rise to additional tax liability. But with telecommuting on the rise and many states challenged to find new revenue sources, don’t be surprised if more states jump on the “nexus” bandwagon.