May 12, 2023
Indiana law gives nonresident income tax and withholding relief for short-term business travelers and their employers
On May 4, 2023, Indiana Governor Eric Holcomb approved SB 419, which, effective January 1, 2024, exempts from Indiana adjusted gross income compensation received by nonresident employees (other than professional athletes and public figures) for services they provide within Indiana for 30 days or less during the calendar year.
The exemption applies only if employees were not Indiana residents at any time during the calendar year.
If employment within Indiana exceeds 30 days in the calendar year, all compensation is included in Indiana adjusted gross income, including compensation for the first 30 days of employment.
Income tax withholding
The Indiana Department of Revenue will not impose penalties for an employer's failure to withhold nonresident income tax from compensation earned for less than 30 days in the calendar year provided one of the following applies:
Rules for counting 30 days
Employees are considered present and performing employment duties within Indiana if they perform more of their employment duties within Indiana than in any other state during a particular day.
If an individual performs substantially similar job duties for an employer during a calendar year while designated both as an employee or in a capacity other than as an employee, the number of days considered worked in Indiana must be aggregated, without regard to the individual's designation as other than an employee.
Convenience of the employer rule does not apply
The law makes clear that if an employee is working at a location other than a physical location of the employer, "the employee is considered to be working in the state or states in which the services for the employer are performed, regardless of the physical location of the employer."
Indiana local taxes
The law stipulates that the state's 30-day nonresident income tax exemption does not alter the application of Indiana local tax and withholding obligations.
Ernst & Young LLP insights
Indiana is now one of 28 states that makes a de minimis exception to the nonresident income tax withholding requirement based on days or earnings.
States vary in their approach to this provision. For instance, New York's 14-day rule applies only to income tax withholding and not to the income tax obligation, and some states (e.g., Louisiana) require that the employee provide the employer with a certificate of nonresidence for the exemption to apply. (See the "insights" section of our March 2023 issue of Payroll Month in Review for more information about nonresident income tax exceptions.)
Employers should review their state and local nonresident income tax withholding obligations with an employment tax advisor to confirm compliance and reduce their potential for underwithholding and reporting risks.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor
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