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Under recently enacted SB1515 and effective January 1, 2020, nonresident employees are subject to Illinois income tax only if they work 30 or more days within the state. Under current law, there is no de minimis exception for nonresident employees — employers are required to withhold Illinois income tax on all compensation earned within the state without regard to the number of working days present. (Illinois Publication 130.)

Details

• Apportionment. For purposes of the nonresident income tax requirement, compensation includes the portion of the employee's total compensation for services performed on behalf of their employer during the tax year that the number of working days spent within Illinois during the tax year bears to the total number of working days.
• Working days — paid time off, weekends. The law clarifies that when determining if the 30-day threshold has been reached, days in which the employee performs no services for the employer are disregarded. Examples given are weekends, vacation days, sick days and holidays.
• Working days — travel time, partial work days. A working day is defined as a day in which the employee performs services on behalf of the employer and spends a greater amount of time performing duties on behalf of the employer within Illinois, without regard to time spent traveling, than is spent performing duties outside of Illinois. However, a working day is counted if the only service the individual performs on behalf of the employer on that day is traveling to a destination within Illinois, and the individual arrives on that day.
• Working days — disaster services. Working days also do not include any day in which employees are performing services in Illinois during a disaster period solely in response to a request made to their employer by the government of Illinois, any political subdivision of Illinois, or a person conducting business in Illinois to perform disaster- or emergency-related services. Other requirements also apply to this exclusion.
• Recordkeeping. The 30-day de minimis exception applies if the employer can meet certain substantiation requirements. If the employer maintains a time and attendance system that tracks daily where employees perform services, data from the time and attendance system will be used. A time and attendance system is defined as a system: (a) in which the employee is required to contemporaneously record the work location for every day worked outside of Illinois where the employment duties are primarily performed; and (b) that is designed to allow the employer to allocate the employee's wages for income tax purposes among all states in which the employee performs services.

In all other cases, the employer is required to obtain a written statement from the employee of the number of days reasonably expected to be spent performing services in Illinois during the taxable year. Absent the employer's actual knowledge of fraud or gross negligence by the employee in making the determination, or collusion between the employer and the employee to evade tax, the certification made by the employee and maintained in the employer's books and records shall be prima facie evidence and constitute a rebuttable presumption of the number of days spent performing services in Illinois.

Ernst & Young LLP insights

This Illinois legislation brings welcome relief to employers, but they need to proceed with caution. The law clearly specifies records that businesses must maintain to substantiate that the 30-day exception to the income tax withholding requirement applied to compensation earned within Illinois. Accordingly, affected employers will need to determine before 2021if their time and attendance systems meet the requirements or, if instead, they will collect written statements from employees as described in the legislation.

Illinois joins 23 other states that specifically exempt from nonresident income tax wages paid to employees who are present in the state to perform occasional duties that are incidental to the employee's out-of-state job duties. The de minimis threshold at which state nonresident income tax withholding applies may be based on income derived while working in the state during the year (e.g., for Idaho, less than $1,000 in a calendar year), or the number of days present in the state, or a combination of both. The "days threshold" ranges from 12 (e.g., Maine) to 60 (e.g., Hawaii).

Outside of these 23 states, and with limited exceptions, all covered wages derived from employment in a nonresident state are generally subject to the state's personal income tax and withholding requirements.

Since 2012, the US Congress has attempted to pass legislation to simplify and streamline state nonresident income tax. This year, Senators John Thune (R-SD) and Sherrod Brown (D-OH) reintroduced the Mobile Workforce State Income Tax Simplification bill (S.604).

Under the federal bill, nonresident income tax would be simplified and streamlined for individuals and employers by prohibiting states from imposing income tax on individuals who work within a nonresident state for 30 or fewer days in the calendar year.

For applicable nonresident employees, employers would be relieved of withholding nonresident income tax and meeting any related information reporting requirements.

Recordkeeping would also be simplified by releasing employers from withholding or reporting penalties if they rely on an employee's annual determination of time to be spent working in the nonresident state (assuming there is no fraud or collusion).

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