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Illinois DOR Clarifies Withholding Requirements for Remote Work

Posted on May 22, 2020

The Illinois Department of Revenue has issued a bulletin clarifying withholding requirements for out-of-state employers with Illinois resident employees working from home in the state.

The informational bulletin was posted to the DOR website May 19, 59 days after Gov. J.B. Pritzker (D) issued executive order 2020-10 requiring residents to stay at home. 

The bulletin clarified that employee compensation is subject to state income tax withholding for any employee who "has performed normal work duties in Illinois for more than 30 working days." According to the bulletin, an out-of-state employer "may be required to register with the [DOR] and withhold Illinois Income Tax" from employees who have "performed work for more than 30 days from their home in Illinois." 

Out-of-state employers who currently are registered and withhold taxes should continue, the bulletin said.

The DOR will waive penalties and interest for out-of-state employers that fail to withhold income taxes for Illinois employees who are working from home because of the pandemic.

The requirement doesn’t apply to out-of-state employers based in Iowa, Kentucky, Michigan, or Wisconsin, which all have reciprocal agreements with Illinois. 

“It’s ridiculous,” Joseph Bishop-Henchman, counsel with McDermott Will & Emery, told Tax Notes. “The public health necessity for businesses to close central operations and direct employees to work from home should not be used as an ‘opportunity’ to expand tax collection. Other states have agreed to disregard remote work for income tax nexus purposes, and Illinois should too.”

The state took a step toward simplifying interstate tax withholding complexities in August 2019, when Pritzker signed S.B. 1515. The legislation created a uniform 30-day threshold for a nonresident to be subject to Illinois income tax. Working days in the state would not include days spent performing services during a disaster period. The law applies to tax years ending on or after December 31, 2020.

The threshold mirrors efforts at a federal level to enact interstate mobile workforce legislation. H.R. 5674, sponsored by U.S. Rep. Hank Johnson, D-Ga., would establish a 30-day safe harbor on income tax withholding requirements for nonresident workers.

A number of states have issued new guidance on the nexus considerations around remote work as employees continue to heed stay-at-home orders to prevent the spread of the coronavirus.

The Indiana DOR announced in a COVID-19 FAQ that an employee's location would not be used as a basis for establishing nexus if the employee is temporarily working at that location as a result of the pandemic.

New Jersey and Mississippi have both issued guidance stating that they will not impose income taxes on employees temporarily working remotely in their states because of the pandemic. The District of Columbia announced that it won’t seek to impose nexus for the corporate franchise or unincorporated business franchise taxes on the basis of employees working from, or related property temporarily located in, the District. And Pennsylvania stated that employees working from home wouldn’t create corporate income tax nexus for an out-of-state employer.

On May 15 South Carolina issued an information letter stating it would not use a temporary work location change  because of the pandemic as a basis for establishing nexus or altering the apportionment of income. The relief period extends from March 13 to September 30.

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