Using Virtual Work to Avoid A Nasty Tax Trap

What do you and first baseman Albert Pujols have in common?

Well, if you happen to have a $254 million contract then you have that in common.  Even if you don’t, there is still a good chance that you and Albert could have something in common.

Let’s start out by noting that Albert is a jock.  And apparently a pretty good one! :)   But that makes Albert subject to the Jock Tax.

The jock tax started in California and has since spread to about 40 states.  The basic concept is that a state takes the opportunity to charge professional athletes a quasi-resident tax when they play a game in the state, even though the athlete may not have any actual association with that state.

As a result a pitcher who lives in Texas may well end up filing hundreds of pages of tax returns in several states and can easily end up paying a half million dollars in state taxes.

So, assuming you aren’t a pro pitcher from Texas, what may you still have in common with Pujols?

The answer is that YOU too may be subject to the jock tax, even if you aren’t a jock, and even if you don’t know it.

Although the laws were originally intended to apply to professional athletes and entertainers they are written so broadly that they can, and do, apply to almost anyone performing work within a state.  If you happen to be a business person from Texas who manages a team with members in Silicon Valley you may well owe state tax to California if you travel to meet with the team in California.  Note that if both you and the team met in Las Vegas then you wouldn’t owe California tax.   The taxation is based solely on the location of the meeting.

Many of the jock-tax states start charging taxes as soon as someone’s total number of annual visit days passes some threshold.    If the state has a minimum threshold of 10 days then making a three day trip each quarter will result in the need for the employee to file a state tax return and pay state taxes.

Historically states targeted athletes and famous entertainers in part because their schedules were visible to the public.   In recent years posts in social media sites have made schedule information for less famous people equally visible.   Many states now search social media sites to secure schedule information for targeted people.  There is also a growing trend to audit the travel schedules of various corporate executives to search for tax opportunities.

Current enforcement is often arbitrarily targeted but the general trend is clearly increasing.  In many cases those “arbitrary targets” have no idea that they are engaging in taxable behavior and receive tax notifications out of the blue.

Anyone who travels as a part of their business activity should take some time to become familiar with the particulars of their situation but should also consider the use of virtual work to reduce their potential tax liability.

For example, if the hypothetical traveler mentioned above conducted one of the four quarterly meetings virtually they would fall under the threshold so no taxes would be due.  Although this is an arbitrary example there are many real world cases where jock taxes can be avoided simply by making use of virtual work.

There are many advantages to telework and virtual work in general.  Some of those advantages are well known; others are less obvious.

One of those is the use of virtual work to avoid a nasty tax trap.


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