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Has your company relocated from Illinois to Indiana? If so, there are various payroll tax issues that impact your business and its employees.

Employer

First off, the employer must get registered with the Indiana Department of Revenue and state unemployment agencies.  An employer must withhold Indiana state income tax, as well as Indiana county tax, from their employees’ salary unless the employee resides in a state that has a reciprocity agreement with Indiana. Indiana has established reciprocity agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin concerning the collection of individual income tax from Indiana nonresidents employed in Indiana. These reciprocity agreements provide that Indiana will not impose adjusted gross income tax on the salaries and wages earned by legal residents of states with reciprocity who work in Indiana. Because of these reciprocity agreements, Indiana employers are not required to withhold Indiana individual income tax from qualified nonresidents under the reciprocity statute but are still encouraged to withhold local county income tax at the nonresident rate.

A qualified nonresident employee who works in Indiana is required to submit a properly completed Indiana Form WH-47 to his or her employer. This form identifies the employee’s state of legal residence. Since Indiana does not have a reciprocity agreement with Illinois, companies with employees working in Indiana and living in Illinois must withhold Indiana state and local income tax from their gross pay. When an employee is setup in the payroll system it is critical to indicate the proper state for withholding and for unemployment.

Employee

Employees that reside in a state that is not covered by Indiana’s reciprocal agreement must file the required Indiana individual state income tax form as referenced in the table below:

State of Residency Residency Required IN Form to File Due Date
  • Indiana, working in Indiana
Full Year IT-40 April 15th
  • Indiana, working in Indiana
Partial Year IT-40PNR April 15th
  • Kentucky, Michigan, Ohio, Pennsylvania or Wisconsin working in Indiana
Full or Partial Year IT-40RNR April 15th
  • All other states, working in Indiana
Full or Partial Year IT-40PNR April 15th

Employees with full-year Illinois residency that earned income in Indiana are required to file individual income tax returns with both Illinois and Indiana taxing authorities. Indiana Form Schedule A from Form IT-40PNR is utilized to apportion the income that is taxable by Indiana.

For example, in 2016, a full year Illinois resident works the entire year in Munster, Indiana (Lake County). The employer is required to withhold Indiana state income tax from the employee’s wages at the enacted Indiana state income tax rate of 3.30% plus the applicable Indiana county income tax rate (Lake County – 0.50%) for wages earned. The employee is required to file Indiana Form IT-40PNR including Schedule CT-40PNR “County Tax Schedule for Part-Year and Full-Year Indiana Nonresidents.” The employee would also report the applicable credit for taxes paid to Indiana on their respective Illinois income tax return (IL-1040).

If the employee has a tax liability for the taxable year to Illinois greater than $500 after subtracting withholdings and credits, the individual may be subject to an underpayment of estimated tax penalty. However, the employee has multiple options to avoid having an income tax liability to Illinois. The employee may have the employer withhold Illinois taxes from their wages or may choose to make estimated tax payments. Estimated tax payments require equal installments generally due on the 15th day of April, June, September, and January following the end of the taxable year.

Selden Fox prepares tax returns for both companies and individuals in addition to providing year round tax planning. The firm’s Accounting Solutions group also assists companies with their regular payroll requirements or can provide guidance and advice on handling payroll within the company.

Mike Kram

Mike performs audit, review, compilation, consulting and tax services for manufacturing, governmental, non-profits, employee benefit plans, and financial institutions clients. He is active in all aspects of an engagement, including audit fieldwork, report preparation and tax preparation.