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The Hidden Cost of Letting Workers Telecommute (wsj.com)
105 points by heyjonboy 2370 days ago | hide | past | web | favorite | 59 comments

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.

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.)

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.

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.

This concerns me:

"...states could still make a case for taxing the former employer."

That makes it sound like if My Company in my state has any interaction with Your Company in your state, both of our states can suddenly make a case that we're both doing business in both states and they'd try to hold us responsible for additional tax.

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?

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.

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.

Yep. Better to just hire someone offshore then. Killing domestic telecommuting is not going to be good for jobs.

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.

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.

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).

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"

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....

Financial: http://www.irs.gov/businesses/small/article/0,,id=179113,00....

Type of Relationship: http://www.irs.gov/businesses/small/article/0,,id=179116,00....

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


All of this information is available here:


A handful of the employees affected in my group were re-hired as contractors.

Those states are going to have a field-day in the event of an audit. We had a ton of trouble recently with a contractor (who worked on his own time, with his own equipment, for a specific duration on a project)... I can only imagine what states will see when they find out they brought back former employees. It's going to be very difficult to justify them as contractors.

Can you clarify what state and what kind of trouble you had with the contractor? Were they contracting through a corp/LLC?

This is a bit late, but oh well.

It was a single contractor, working on a project tangential to our primary codebase (an add-on product). He had several other clients and projects at the time and was paid by the hour for the work.

Part of the issue was that he was operating as sole proprietor, which meant he had no legal entity for his work. The state wanted to see that he was operating as a business and the lack of any legal entity surrounding his business made that a bit difficult.

We managed to get it sorted.. took more of our time than I'd like tho.

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)

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?

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.

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

I did the reverse :(

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.

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"?

It gets even better when states like New York can't even define what "doing business" actually means:

"Most of the law of 'doing business' is found in the decisions of courts. Those cases afford no precise measure of the extent of the activities which may be determinative of whether a foreign organization is doing business in New York for purposes of qualification. Each case must be decided on its own facts."


[where "foreign" == not organized in New York, not necessarily overseas]

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

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

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"...

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.

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

What about P2P systems such as Skype?

I can't imagine Rackspace would be happy with the impact that would have on their clients...

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?

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.

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.

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

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.

I'm not confusing the visas, though I probably could have made it clearer. I'm not talking about what you can do with the visa waiver. I specifically mentioned the case where the visitor is from South America, because there's no visa waiver for us.

For people who are require to have visas, the tourist visa and the business visa are issued together. When you get to the port of embark, you tell the immigration officer whether you're coming for business or pleasure.


> 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.

Yeah, that's the situation I described.

> It does not allow you to work.

...for an US entity. If you're going for business then you're working, right? Anyway, even if it's not specifically allowed, there's a gray area.

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

I read that, I think he was quite naive and uninformed. He should have done what I described. "I'm working for DutchCorp, and will go to a business trade event, here's the invitation". Then he would make sure the event organizers would not pay him directly. They would pay his Dutch company, and he would get paid in Netherlands, not in US.

I'm pretty sure you can travel under VW and still do business for a foreign corporation. Like if I come to the US for a trade show or to negotiate a deal, I can come under VW. I don't know what the specific rules are (I'm pretty sure you can't work for a US corporation) but I don't think there is a blanket prohibition on doing work for a foreign company.

That sounds similar to my situation when I first moved to Canada from Australia: I continued to work for the company in Australia, and so I wasn't required any special visas or permits to work that while in Canada.

However, I did have to continue to extend (and therefore satisfy the requirements of) the normal visitors visa (which seemed to be waived for a certain period of time, but then I had to renew it).

I shouldn't be a problem, as long as all you're doing is writing code while you're here ... you're not using a US phone number on your site or listing a US address as your business address etc ... It really shouldn't be a problem, but I'm not a lawyer

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.

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!

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?"

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

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

To "parasitize" not capitalize.

That's one way to stop outsourcing...

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.

"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 ).

That's one way to stop outsourcing...

Only in the sense that it's a giant incentive to outsource all your work overseas where this kind of trauma will never pop up to destroy your business.

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

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.

The IRS has very specific rules for who can be considered an employee and who can be considered a contractor

Actually the IRS has very vague and inconsistent rules about who can be considered an employee or a contractor. Look them up and manufacture facts and documentation to stay as far on the right side as you can.

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

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

There is some specific legislation for software contractors that was passed in 1986 that make it difficult for them to be independent contractors who work solely for one company. The IRS is pretty active about enforcing it.

This is why most companies hire software contractors via companies who employ multiple contractors, and never directly.

Not a problem assuming you're fine with 100% staff turnover.

Meh, I think it requires a truly different relationship but it can totally work if both sides are mature about it. Usually though, the contractor gets lazy or the employer wants more control. Then you have no choice but to make them an employees so you can direct them.

Edit: just read your top-voted post. If you can swing it, definitely go for it. I just think it is way too much paperwork and a bootstrapped startup probably couldn't afford it.

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