Illinois recently enacted legislation that changes the rules for withholding income tax from non-resident employees. The new rules replace the current, somewhat more complicated rules with a more straight-forward method that is based on, among other things, the number of working days that an employee spends in Illinois.
Current Withholding Rules
Currently, every employer maintaining an office or transacting business in Illinois that is required to withhold federal tax from compensation paid to a non-resident employee in Illinois is also required to withhold Illinois income tax from such payment. Compensation is considered paid to an employee in Illinois if:
- the employee’s services for the employer are performed entirely within Illinois;
- the employee performs some services for the employer outside of Illinois but those services are incidental to the services that the employee performs for the employer within Illinois; or
- the employee performs some services for the employer within Illinois and the employee’s base of operations or, if the employee has no base of operations, the place from which the employee’s service is directed or controlled is within Illinois.
New Withholding Rules
Effective for tax years ending on or after December 31, 2020, employers are required to withhold Illinois income tax from compensation paid to a non-resident employee if:
- the employee performs some services within 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.
The amount of compensation that is considered paid in Illinois under the new rules is the portion of the employee’s total compensation for services performed for the employer during the year which the number of the employee’s working days spent in Illinois during the year bears to the total number of the employee’s working days spent everywhere during the year.
What is a Working Day?
A working day is any day during the year in which the employee performs services on behalf of the employer. Days in which the employee performs no services on behalf of the employer (e.g., weekends, vacation days, sick days and holidays) are not considered working days. Further, a working day is considered spent within Illinois if (i) the employee spends more time that day performing services for the employer within Illinois (without regard to any time spent traveling) than the employee spends performing services for the employer outside of Illinois, or (ii) the only services that the employee performs for the employer on that day is traveling to Illinois and the employee arrives on that day.
A working day does not include any day during a disaster period in which an employee performs services in Illinois solely in response to a request made to the employer by a business or by an Illinois state or local government to perform disaster or emergency-related services in Illinois. Disaster or emergency-related services generally mean repairing, building or performing other business activities related to infrastructure that has been damaged or destroyed by a state or federally declared disaster or emergency event. A disaster period is the period that begins 10 days before the earlier of the date of the Illinois governor’s proclamation or the President’s declaration of a state of emergency or a federal major disaster and ends 60 days after the end of the declared disaster or emergency period.
Tracking Where an Employee Performs Services
If an employer maintains a time and attendance system that tracks where employees perform services on a daily basis, then the information provided by that system is used to determine whether non-resident employees are subject to Illinois tax withholding. A time and attendance system is a system (i) in which an employee is required to contemporaneously record the employee’s work location for every day that the employee works outside of the state where the employee primarily works, and (ii) that is designed to allow the employer to allocate an employee’s wages for tax purposes among all the states in which the employee works.
If an employer does not maintain a time and attendance system, the employer is required to obtain a written statement from its non-resident employees indicating the number of days that the employee reasonably expects to perform services in Illinois during the year. Unless an employer has actual knowledge of an employee’s fraud or gross negligence in preparing the statement, or there is collusion between the employer and the employee to evade tax, the employee’s certification is prima facie evidence of the number of days that the employee spent working in Illinois.
Unfortunately, the law does not explain how an employer should address the situation where it fails to withhold Illinois tax from wages paid to a non-resident employee for the employee’s first 30 Illinois working days if the employee ends up working in Illinois for more than 30 working days and the failure was either because the employee’s statement incorrectly estimated that the employee would work less than 30 days in Illinois or because the employer maintained a time and attendance system but did not begin withholding Illinois tax until after the employee had more than 30 working days in Illinois. Perhaps future guidance will answer this question.
The new rules should make it easier for Illinois employers to determine when they are required to withhold Illinois income tax from wages paid to non-resident employees. Illinois employers with non-resident employees should either implement a time and attendance system by January 1, 2020 or prepare a form statement that non-resident employees can provide to the employer before January 1, 2020 (and before each subsequent January 1) estimating the number of days they reasonably expect to work in Illinois during the year.