Thursday, June 5, 2014

Senate Bill Challenges Convenience of the Employer Test


On May 15, Senate Bill 2347—the Multi-State Worker Tax Fairness Act of 2014—was introduced in the U.S. Senate. This is companion legislation to a house bill introduced in February. This federal legislation would prohibit states from applying the convenience of the employer test on nonresident employees. Taxation would instead be based on physical location. This means a state may deem a nonresident to be present in or working in the state only if the employee is physically present in the state during that time.

There is strong support and opposition to the proposed federal legislation. The National Taxpayer’s Union argues the bill would help telecommuters and their employers avoid complicated state income tax requirements. On the other side, the Federation of Tax Administrators argues that the bill would remove a state’s ability to set its own rules and result in revenue loss.

The convenience of the employer test allows for employees who commute for work to have their income taxed not only in their home state but also in the state in which a job is performed. New York is the most well known user of this taxation practice. Nonresident employees of N.Y.-based companies who telecommute and perform services both in and outside N.Y. are required to pay N.Y. tax on all income earned. The only exception to this rule occurs if the employee can prove work is done out-of-state for employer’s necessity and not the employee’s convenience.

See PayState Update Volume 16, Issue #12 for more information on the convenience of the employer test and the proposed legislation.