May 22, 2023
Montana law gives nonresident income tax and withholding relief for short-term business travelers and their employers
On May 18, 2023, Montana Governor Greg Gianforte approved H.B.447, which, effective January 1, 2024, exempts from Montana source income compensation received by nonresident employees (with the exceptions noted below) for services they provide within Montana for 30 days or less during the calendar year.
The exemption applies only if employees performed employment duties in more than one state during the calendar year.
If employment within Montana exceeds 30 days in the calendar year, all compensation is included in Montana source income, including compensation for the first 30 days of employment.
Key employee and other exceptions
HB 447 uniquely excludes key employees from the 30-day safe harbor. A key employee is defined as "an individual who, for the year immediately preceding the current tax year, had annual compensation from the employer of greater than $500,000."
Other individuals also excluded from the safe harbor include:
Income tax withholding
Provided one of the following applies, the Montana Department of Revenue will not impose penalties for an employer's failure to withhold nonresident income tax if the error was due to miscalculating the number of days nonresident employees were present in Montana:
Rules for counting 30 days
If nonresident employees are present in Montana for any part of a day, they are considered present for that entire day unless their presence is solely for purposes of transit through Montana.
Other Montana taxes
The law stipulates that the state's 30-day nonresident income tax exemption does not alter the application of other Montana taxes.
Ernst & Young LLP insights
Montana is now one of 29 states that makes a de minimis exception to its nonresident income tax withholding requirement based on days or earnings. Recently, Indiana legislation was enacted, which, effective January 1, 2024, allows for a 30-day de minimis exception to its nonresident income tax and withholding requirements. (See EY Tax Alert 2023-0871.)
As Montana's unique key employee exclusion demonstrates, states vary in their approach to the nonresident income tax safe harbor. For instance, New York's 14-day rule and Vermont's 30-day rule apply 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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