Tax

Easing State Withholding & Filing Requirements for Employers & Employees

2015
Author:  Rich Boer

Rich Boer

Director

SALT Services

201 N. Illinois Street, Suite 700
P.O. Box 44998
Indianapolis, IN 46244-0998 (46204)

Indianapolis
317.383.4000

Currently, 43 states and the District of Columbia impose a tax on personal income earned in their state. As the U.S. continues to shift toward a more service-based economy with an increasingly mobile workforce, the need for employers and employees to stay current on nonresident withholding and tax filing requirements continues to intensify. With varying state rules on these issues, employers and employees face an increasingly overwhelming task in order to remain compliant.

Differences among the states range from the methodology used to determine withholding and tax return filing requirements to differences in specific threshold amounts. Some states use a time threshold to determine filing requirements, while others use an earnings threshold. In Maine, withholding isn’t required if a nonresident employee is in the state for 12 or fewer days and doesn’t earn more than $3,000 in the taxable year. However, in Arizona, withholding isn’t required if a nonresident employee is physically present in the state performing a service that will benefit the employer for less than 60 days in the taxable year.

Fortunately, legislation under consideration in Congress could help employers and employees with these burdensome requirements.

On May 14, 2015, the Mobile Workforce State Income Tax Simplification Act of 2015 was introduced in the U.S. House of Representatives. This bill would prohibit states from taxing wages and other remuneration earned by nonresident employees performing employment duties in a state for less than 31 days during the calendar year. This prohibition wouldn’t apply to professional athletes, professional entertainers or other public figures who perform services for wages or other remuneration on a per-event basis. On June 17, 2015, the bill was passed out of the House Judiciary Committee. Since its passage, bipartisan support has continued to grow; today, the bill has 130 co-sponsors.

While the strong bipartisan support for this legislation should be encouraging for employers and employees, such encouragement should be tempered by recent history. Federal legislation limiting states’ ability to subject employers to withholding rules and employees to personal income tax filing requirements has been introduced numerous times over the past several years, including in 2006, 2007, 2009, 2011 and 2013. Opponents have argued that such limitations create a system of tax avoidance allowing individuals and their employers to avail themselves of a state’s economy without having to pay for the benefit. They’ve also said such legislation infringes upon state sovereignty.

While the act appears to have strong bipartisan support, employers and employees should closely monitor its status, since its future remains uncertain. For the time being, be aware that the presence of nonresident employees in a state may create nonresident withholding and income tax filing requirements for both employers and employees.



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