Effective for tax years ending on or after December 31, 2020, employers are now required to withhold Illinois income tax from compensation paid to a non-resident employee if:
- The employee performs services in Illinois;
- The employee’s services that are performed within Illinois are not incidental to services that the employee performs outside of Illinois; and
- The employee performs services within Illinois for more than 30 working days during the tax year.
Prior to this change in the law, if an employee had performed services partly within Illinois and partly outside Illinois, prior law required the employee’s compensation to be sourced to Illinois only if the employee’s base of operations was in Illinois. Therefore, in the past either all wages were sourced to Illinois or none of the compensation was sourced to Illinois.
Under the new law, the employee’s compensation earned while in Illinois is taxable in the state only after a nonresident employee has spent 31 work days in Illinois. Once that threshold has been met, the compensation associated with all days worked in Illinois is taxable.
For example, under the old law if a Florida resident worked in Florida for 10 months and Illinois for two months, all wages would have been sourced to Florida, a state with no state income tax. Under the new law, this individual would have to pay Illinois tax for the compensation associated with the two months spent in Illinois.
A working day is any day during the year in which the employee performs services on behalf of the employer. Therefore, weekends, vacation days, sick days, and holidays are not working days. A working day is considered spent in Illinois if the employee spends more time that day performing services for the employer within Illinois than the employee spends performing services for the employer outside of Illinois. It is also considered a working day in Illinois if the only services that the employee performs for the employer on that day is traveling to Illinois and the employee arrives on that day.
For purposes of determining compensation paid in Illinois, if an employer maintains a time and attendance system that tracks where employees perform services on a daily basis, then data from the time and attendance system must be used. In all other cases, the employer must 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.
This means that employers must withhold Illinois income tax for nonresident employees who spend more than 30 working days in Illinois starting in 2020. To calculate withholding amounts, the new law requires employers to multiply an employee’s total compensation for the tax year by a ratio of the working days the employee spends performing services in Illinois over the total working days the employee spends performing services both within and outside of Illinois during a tax year.
Illinois has not addressed whether withholding should be done when the employee first starts working in Illinois or after 30 days. For companies with Illinois non-residents, employees may be hitting the 30 days threshold soon, therefore employers should maintain a withholding policy with their payroll providers.
The new law does not effect residents of Iowa, Kentucky, Michigan, and Wisconsin. The reciprocal agreement still applies for those states.
If you have questions about the new nonresident withholding requirements, please contact Selden Fox for additional information. We look forward to speaking with you soon.