The Hidden Cost of Letting Workers Telecommute
online.wsj.com
online.wsj.com
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.
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.)
"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.
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.
"...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.
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.
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.
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...
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...
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.
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.
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.
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.
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.
What about P2P systems such as Skype?
"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."
http://www.dos.state.ny.us/cnsl/do_bus.html
[where "foreign" == not organized in New York, not necessarily overseas]
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.
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).
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.
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
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.
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.
http://www.workpermit.com/us/employer_b1_b2.htm
> 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.
This comes at enormous cost to my dignity.
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!
> 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?"
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 ).
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.
This is why most companies hire software contractors via companies who employ multiple contractors, and never directly.
PDF warning: [1] http://www.irs.gov/pub/irs-utl/x-26-07.pdf see pages 3-5
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.
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.