September 26, 2024 Indiana rules that remote Kentucky worker is not subject to local income tax The Indiana Department of Revenue (Department) issued a ruling confirming that the wages of a Kentucky resident working remotely for an Indiana employer were not subject to Indiana county income tax because the great percentage of gross income was derived from Kentucky and not Indiana. (Indiana Department of State Revenue, Letter of Findings: 01-20232204.) Background For tax years 2020 through 2022, a Kentucky resident (Taxpayer) performed services for her Indiana employer from her home office and was physically present at the Indiana work location about a dozen times in that period. Her employer did not withhold Indiana state or county income tax from her wages. For each of the three tax years, the Taxpayer filed an Indiana Reciprocal Nonresident Income Tax Return (Form IT-40PNR) as required for Kentucky residents covered by Indiana's reciprocal income tax agreement. (Form IT-40PNR Booklet.) The Department sent the Taxpayer a notice of proposed assessment for Indiana local income tax owed on wages she received in 2020–2022. Assessments were not made for Indiana state income tax because, under the reciprocal income tax agreement between Indiana and Kentucky, state income tax is owed only to Kentucky, the Taxpayer's state of residence. The Taxpayer protested the assessment, arguing that as a resident of Kentucky who worked remotely from her home and was seldom physically present at the Indiana location, she had no liability for Indiana county income tax. In support of her protest, she provided the Department with a notarized letter from her employer and copies of her Forms W-2 and Kentucky individual income tax returns for tax years 2020–2022. Findings Indiana law contemplates that nonresidents working in Indiana may be subject to income tax both in Indiana and in their state of residence and attempts to mitigate this situation through reciprocity agreements. Specifically, Indiana has entered into reciprocal income tax agreements with Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin whereby residents of these states working in Indiana pay income tax only to their state of residence. (Indiana Income Tax Bulletin 28; Ind. Reg. 045220044NRA.) County income tax is excluded from these reciprocal agreements. (IC 6-3.6-8-5(b).) Under IC 6-3.6-2-13, county income tax applies to:
45 IAC 3.1-4-8 defines an individual's principal place of business or employment as "the county where the taxpayer receives the greatest percentage of his or her gross income from salaries, wages, commissions, fees, and similar income." The court ruled that the Taxpayer established that the Department's assessments for county income tax were incorrect. In support of its ruling, the court found that (1) the Taxpayer is a Kentucky resident who is employed by and earns income from an Indiana employer; (2) the Taxpayer's employer provided a notarized statement detailing the time she physically provided services at the Indiana work location; (3) in no year was the Taxpayer in the state of Indiana for her employment more than 19 days; and (4) the Taxpayer established that she received the greatest portion of her gross income outside of Indiana. The court also found that for purposes of Indiana county income tax, the Taxpayer's principal place of business or employment is her home in Kentucky, where she receives the greatest percentage of her gross income and where she primarily executes her employment duties. Ernst & Young LLP insights Indiana employers with out-of-state remote workers should confirm that they are complying with state and county income tax withholding requirements and, upon request, provide them with annual statements showing the number of days physically performing services within Indiana. This annual statement will be helpful to remote workers who believe they have received incorrect county income tax assessments from the Indiana Department of Revenue.
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