

The Hidden Cost of Letting Workers Telecommute - heyjonboy
http://online.wsj.com/article/SB10001424052702304066504576345782284098222.html?KEYWORDS=telecommuting+tax

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spolsky
It's really not that big a deal. At Stack Exchange I think we have employees
in eight different states now, all individuals working from home. It's a lot
of paperwork but not disproportional to the amount of paperwork you have to do
per-employee anyway. It does cost something to deal with but it's a rounding
error compared to the cost of those people's salaries. It is by no means a
reason not to hire people who work from home in other states.

It DOES require us to collect sales tax for a bunch of different states,
though. This would be a big deal if we were an ecommerce company... you'll
notice that Amazon is fanatic about avoiding telecommuters; they don't want to
accidentally get themselves in a position of effectively raising their prices
by 8% on the entire state of Texas just to have one remote employee there.

~~~
falsestprophet
Some questions for Joel/anyone else:

Do you need to pay corporate income taxes in these states as well?

It is possible avoid state income taxes and collecting sales taxes by hiring
these employees as independent contractors (if you were willing to give them
whatever autonomy was sufficient)?

Do you know if there similar tax consequences to hiring employees who are
residing overseas?

(Of course the real answer to all of these is consult an attorney.)

~~~
jsiarto
We pay proportional taxes on the % of income that comes from other states. For
example, if 80% of our revenue comes from Illinois and 20% from Michigan--we
only pay taxes on the 20% from Michigan.

"Doing business" (as far as our accountant is concerned) is having billable
clients in those states--generating revenue. We've had employees in 3 states
(MI, IL and FL) and the only concern is making sure you are meeting that
states payroll tax and withholding policies.

On a related note: Some states have different workers comp laws. We we're not
required to carry workers comp in Illinois, but did need it in Michigan (and
we also had to insure our Illinois employee, because she was now working for a
company that was based in Michigan).

It's a confusing mess sometimes--seek help from accounts and lawyers and don't
be afraid to call the state and just ask.

~~~
wisty
I've found that calling government offices can sometimes be extremely helpful.

Civil servants are often very smart, and sometimes very bored. Also, unless
they are in a position where they regularly face the public, talking to
"civilians" can scare them a little - they don't want to be accused of
stuffing up. (As long as you are talking off the record, not getting written
advice - they hate paper-trails. Written advice is to "double check" that it's
all OK).

They can really go out of their way to give free advice.

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clarkevans
Sounds like good way for rural states to further depress their economies.
You'd think they could use all the tax revenue possible. Having a
telecommuting worker pays property tax, income tax, and spends their money at
the local food establishments. All this without having to give "tax
intensives" for a company to move into the state. What could be better than
that?

~~~
cosgroveb
I probably shouldn't have to point this out but the last time I checked New
Jersey isn't in flyover country and it's the only example cited in this
article.

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jdp23
As somebody whose last startup had people working remotely from four different
states ... yikes!

With state budgets as tight as they are, it's no surprise to see them looking
for reasons to tax out-of-state companies. And it sounds like it's still not
clear just how much tax liability this will lead to. But wow, it sure sounds
like a minefield for startups.

~~~
wisty
Yep. Better to just hire someone offshore then. Killing domestic telecommuting
is _not_ going to be good for jobs.

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scottw
Discovery (DISCA) faced this issue in 2008 and decided to lay off all
employees who lived in a state with this tax nexus law (I was one of them).
There were a total of three employees in my state, but there were probably
scores of employees around the country. They probably saved several million
dollars annually in sales tax by doing this (back of the envelope
calculations). A handful of the employees affected in my group were re-hired
as contractors.

~~~
mikeryan
Note that as a company you can't just re-hire as W2 contractors. Generally (as
the article states) you need to have the employees form some sort of corporate
entity or work for a corporate entity. Both employment and tax law will treat
solo W2 contractors (or even single member LLCs) as full time employees if
you're working full-time for a single entity.

A lot of times companies will hide these types of contractors behind agencies,
but its a tricky balance. Point being if you run a small company and are
running into these types of issues talk to an accountant and or an employment
attorney before thinking you can just hide full time employees behind a
"contractor" label, its not a fool proof solution.

~~~
chopsueyar
Where did he say he anyone was rehired as a W-2 contractor? 1099 could be
possible (except for the whole work-for-hire IP issue).

~~~
mikeryan
For the IRS or Employment law whether or not you are a fulltime employee has
nothing to do with how your taxes are filed or paid. My point for those on
this board who hire remote employees is that simply re-hiring as a
"contractor" does not change them into "not a full time employee"

~~~
chopsueyar
Well, then the case could be made that they were incorrectly being treated as
employees and should have in fact been contractors.

The IRS looks at the common law rules between the two entities, based on three
categories:

Behavioral:
[http://www.irs.gov/businesses/small/article/0,,id=179111,00....](http://www.irs.gov/businesses/small/article/0,,id=179111,00.html)

Financial:
[http://www.irs.gov/businesses/small/article/0,,id=179113,00....](http://www.irs.gov/businesses/small/article/0,,id=179113,00.html)

Type of Relationship:
[http://www.irs.gov/businesses/small/article/0,,id=179116,00....](http://www.irs.gov/businesses/small/article/0,,id=179116,00.html)

There is even an IRS form, SS-8, which you can submit to the IRS to 'clarify'
how the relationship should be treated...

<http://www.irs.gov/pub/irs-pdf/fss8.pdf>

All of this information is available here:

[http://www.irs.gov/businesses/small/article/0,,id=99921,00.h...](http://www.irs.gov/businesses/small/article/0,,id=99921,00.html)

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simonsarris
On the flip side, if you work in Massachusetts but live in New Hampshire and
work from home some days, you don't have to pay income tax on the days you
worked from home (NH has no state income tax)

~~~
jamesbkel
Of course, wouldn't that also mean that on days that you commute to work
you're paying income tax in MA plus the above-average NH property tax?

~~~
fps
NH property taxes aren't significantly higher than they would be for similar
homes in similar towns in MA.

And yes, if you work in MA and live in NH, you pay MA income tax. Also, if you
live in MA and work in NH, you pay MA income tax.

~~~
bostonpete
Oddly, though, if you live in MA and work in MA, it turns out that you have to
pay NH income tax.

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hkarthik
There's another hidden cost that they didn't mention in this article: benefits
and employment agreement requirements that vary from state to state.

We had a few colleagues that telecommuted from California in a startup that I
worked at 2 years ago. Just for those two employees, the company had to draw
up different benefits and employment agreements to satisfy the local
California laws.

Fortunately, these costs aren't usually ongoing unless you change both on a
regular basis.

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blumentopf
Ludicrous! Imagine an employee living out of state doing work at home, like
preparing slides for a presentation. No telecommuting, just doing work at a
desk. And that's "doing business"?

~~~
pavel_lishin
What about happening to answer the phone while on vacation? Or perhaps working
on a server that's located in another state?

~~~
cosgroveb
Well, Texas has tried recently to say that simply having a server in their
state creates a nexus for sales tax purposes...

~~~
voidpointer
I have no idea how the US tax system works. But how about this thought: from
saying you are taxable if running servers in some state, it wouldn't be a big
leap saying "your javascript code runs in browsers on computers that are in
our state and you are therefore taxable"...

~~~
ianferrel
A pretty big one.

A server is, arguably, a physical location serving products. Javascript
running in a browser is the product served. Going with a tried-and-true car
analogy, a state can't tax a car manufacturer because the cars drive on their
roads, but they can tax them if they produce or sell cars in that state.

~~~
wladimir
It is not always that easy to distinguish servers and clients.

What about P2P systems such as Skype?

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mattiask
I was wondering something similar but for countries. Say that I work for my
own company developing iphone apps or something like that. Now I like to
travel around so I go to the US and work from there, could it be problematic?

~~~
sp_
As far as I know there is no visa that allows foreigners to travel to the US
and work remotely back home. It would be a breach of the Visa Waiver program
(or any other visa) which can lead to deportation.

I'd like to hear from people who did this, told the immigrations officer about
their plans and were not turned back on the border.

~~~
nandemo
IANAL, but say you're a manager of BigSouthAmericanCorp (maybe Euro/Asian,
etc, your mileage may vary) going to a meeting with BigAmericanCorp. Then you
can use the Business visa, which is the same as Tourism visa. As long as
you're not working for an American employee, it's OK to be in US on work
temporarily.

So if I were going to US to work on my own business temporarily, I'd either go
as a tourist or say, "Oh, I'm from Nandemo Ltd., and will go to a business
meeting with SP_ Corp, here's their invitation letter". That's similar to what
I did when I went to US for a job interview at the headquarters of X Corp.
trying to get a job at their Tokyo office. If I had said I was coming to a job
interview they wouldn't let me in; even though I had no intention to work in
US.

One must be out one's mind to volunteer unnecessarily detailed information to
the immigrations officer. Given that there are millions of illegal immigrants
actually working for American employers and not getting deported, the odds
that a web developer working at home would be deported seems pretty slim.

~~~
sp_
First, you are confusing visas. The tourist visa is not the same as the visa
waiver. There is a tourist visa, it's called B-2 and it does not allow you to
do any business or work. Visiting with the visa waiver program means visiting
without a visa.

Next, for short trips, visiting without a visa is equivalent to having a
business visa (B-1). It allows you to meet with US clients, customers,
partners, and so on and it allows you to go to conferences. It does not allow
you to work.

See as a recent example from Hacker News:
<http://www.noop.nl/2011/06/american-learning-experience.html>

~~~
wisty
Exactly. There's a fine line between a business trip, and something that
requires a work visa.

I'd imagine that the best way for a foreigner to work in the US on non-US
projects is if a body-shop (possibly owned by them - I think most people can
own a US company) hires them, then subcontracts them out to the offshore
employer. The question is how they get everything set up while they don't have
a work visa. I wonder if a business visa would allow them to set the paperwork
up? Anyway, it's madness.

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MoreMoschops
Also, I spend most of the day wearing just a dressing gown and if I have to
appear on a webcam for some kind of chat or conference, I smear the lens with
vaseline and hold up a little doll of myself dressed smartly that I made,
wiggling it whenever I'm speaking.

This comes at enormous cost to my dignity.

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hopeless
I work at a large multinational software company where distributed teams have
been encouraged across all projects. I live in Ireland and work in/for a U.S.
team. Many of the U.S. team also work from home.

Recently the edict came down that working-from-home for those employees with
an office was not acceptable. It listed a large number of negative
consequences (loss of career prospects, management visibility, team cohesion,
and social interaction). Each and every one of these applies to me as part of
the distributed team (which is still being implemented) but apparently the
double-standards are ok.

Working from home is a no-no but working from another country is just fine!

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trustfundbaby
Loved this comment

> Gee, and to think we were wondering what businesses could do to create jobs?

Clearly, the answer is "what can government do to stop holding back job
creation?"

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kill-9
Yet another way in which government is trying to thwart efficiencies developed
by capitalist activity.

~~~
corruptmemory
I would say that it's another way for the government to capitalize on
capitalist activity.

~~~
billswift
To "parasitize" not capitalize.

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d0ne
That's one way to stop outsourcing...

~~~
Refringe
This has nothing to do with outsourcing as outsourcing is usually done on a
contract basis. This is a way to stop people from being employed by a company
in a different state.

~~~
d0ne
"Mr. Bobman offers a potential solution: Have the telecommuting employee
resign, form a C or S corporation and invoice the ex-employer for work. But he
warns that the former employer would have to pay the former employee more to
cover new expenses and lost benefits. And, although it would be a challenge,
states could still make a case for taxing the former employer."

It starts with full-time employees and ends with anyone you pay...

Similar to how sales tax started with the location of your company and is now
the location of your servers ( in several states ).

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cheez
The moral of the story is: don't have employees. Have contractors.

~~~
spolsky
Good luck with that. The IRS has very specific rules for who can be considered
an employee and who can be considered a contractor. Attempting to treat people
who should be employees as contractors is one of their number one enforcement
goals, because contractors don't have withholding and are therefore far less
likely to pay their taxes.

~~~
tomjen3
Would that matter, as long as the contractors only work one of projects which
are time limited?

~~~
jaz
It depends on the degree of control you exercise over the individual, if the
individual is offering their services to the public, if the individual
furnishes their own tools to perform services, if the individual performs
services in their own facilities or yours, among other factors[1] weighted
differently in each situation.

PDF warning: [1] <http://www.irs.gov/pub/irs-utl/x-26-07.pdf> see pages 3-5

