Our Remote Obligations and Mobility (ROAM) annual report ranks states from best to worst on their tax treatment of remote workers. From filing thresholds to reciprocity agreements to the individual income tax, there are many policies that impact how welcoming a state can be to remote workers.
The states that score low on the ROAM index should be following the lead of Indiana where, in 2023, elected officials passed new gold-standard rules for how to treat remote workers, including the implementation of 30-day filing and withholding thresholds. Below, NTUF suggests the ideal policies that states can pass to join Indiana and other high-scoring states, and become more attractive for remote workers in an economy where remote work figures to play a major role in the years to come.
30-Day Filing and Withholding Safe Harbor Thresholds
This section establishes 30-day filing and withholding safe harbor thresholds for short-term mobile workers. These safe harbors apply to both individual filers and employer withholding, ensuring that short-term work in the state does not entail a significant paperwork burden for employees and employers alike, often over trivial amounts of revenue. These 30-day thresholds provide certainty and simplicity to taxpayers who travel frequently for work, ensuring that a few days of work in that state will not tie the taxpayer up in red tape.
Note that professional athletes, professional entertainers, and public figures are specifically carved out of this language, ensuring that states are not missing out on revenue from highly-compensated individuals that have the capacity and resources to handle compliance.
SECTION 1.
- For purposes of this section:
1. “Professional athlete” means an athlete who performs services in a professional athletic event for compensation;
2. “Professional entertainer” means a person who performs services in the professional performing arts for compensation on a per-event basis;
3. “Public figure” means a person of prominence who performs services at discrete events, including, but not limited to, speeches, public appearances, or similar events, for compensation on a per-event basis. The term does not include a member of a business's board of directors or similar governing body; and
4. “Time and attendance system” means a system through which an individual is required to record the individual's work location for every day worked outside the state where the individual's employment duties are primarily performed and which is designed to allow the employer to allocate the individual's compensation for income tax purposes among all states in which the individual performs employment duties for the employer.
- Compensation, as defined under [reference state statute], paid to a nonresident individual is exempt from the tax levied under [reference state statute] if all of the following conditions apply:
1. The compensation is paid for employment duties performed by the individual while present in this state for thirty or fewer calendar days in the taxable year;
2. The individual performed employment duties in more than one state during the taxable year; and
3. The compensation is not paid for employment duties performed by the individual in the individual's capacity as a professional athlete, professional entertainer, or public figure.
- An employer is not required to withhold taxes under [reference state statute] for compensation that is paid to an individual described in subdivision (2) of this section, except that if, during the taxable year, the individual performs employment duties while present in this state for more than thirty calendar days, an employer shall withhold and remit taxes for every day the individual performed employment duties while present in this state in that taxable year, including the first thirty days in which the individual performs employment duties in this state.
- The [Revenue Department] shall not require the payment of any penalties or interest otherwise applicable for failing to deduct and withhold income taxes if, when determining whether withholding was required, the employer met either of the following conditions:
1. The employer, in its sole discretion, maintains a time and attendance system specifically designed to allocate employee wages for income tax purposes among all taxing jurisdictions in which an individual performs employment duties for such employer, and the employer relied on data from that system; or
2. The employer does not maintain a time and attendance system and the employer relied on:
i. Its own records, maintained in the regular course of business, of the individual's location;
ii. The individual's reasonable determination of the time the individual expected to spend performing employment duties in this state, provided that the employer did not have actual knowledge of fraud on the part of the individual in making the determination and that the employer and the individual did not conspire to evade taxation in making the determination;
iii. Travel records;
iv. Travel expense reimbursement records; or
v. A signed, written statement from the individual of the number of days spent performing services in this state during the taxable year.
- For purposes of this subsection, an individual shall be considered present and performing employment duties within this state for a day if the individual performs more of the individual's employment duties in this state than in any other state during that day. Any portion of the day during which the individual is in transit shall not be considered in determining the location of an individual's performance of employment duties.
Special Case - Repealing Mutuality Requirements
In the case of a state with a mutuality requirement, or a provision that restricts the applicability of filing and withholding safe harbor thresholds to residents of states with no individual income tax or that have established a “substantially similar exclusion,” this can be addressed simply by removing the relevant language, for example:
- A nonresident individual's wages may not be considered income derived from [state] sources if:
(...)
- the nonresident individual's state of residence:
(i) provides a substantially similar exclusion; or
(ii) does not impose a state individual income tax.
Addressing Convenience of the Employer Rules
Convenience of the employer rules are requirements that taxpayers who switch from working in person for an in-state business to working remotely out-of-state for the same employer continue to pay taxes to their employer’s state. Not only are these rules unfair, requiring taxes from taxpayers who benefit from none of the services funded by those taxes, they can also subject affected taxpayers to double taxation.
From a state policymaker’s perspective, eliminating these rules where they exist should be of utmost importance. They are a concern for resident employees, who risk double taxation if they should ever want to relocate to working remotely out-of-state in the future. But convenience of the employer rules are also a concern for businesses, who may struggle to attract employees to a state where tax obligations might follow them even after they leave.
Even for states that do not currently have a convenience of the employer rule on the books, the below language should be considered in any case. In Alabama, a convenience of the employer rule materialized not because any legislator voted for it — rather, it was a Department of Revenue effort that was upheld in Tax Court. Language explicitly defining what activities subject a nonresident taxpayer to tax obligations prevents tax administrators from filling in the blanks themselves in ways that legislators may not want.
SECTION 2.
- A nonresident individual who is paid a salary, lump sum payment, or any other form of payment that encompasses work performed both inside and outside of [state] shall pay [state] income tax only on the portion of the individual's income that reasonably can be allocated to work performed in [state].
- A nonresident individual performs work in [state] when that individual is physically located in [state] when performing the work.
Individual Income Tax Reciprocity
Reciprocity agreements are agreements between states not to tax each other’s residents when they earn income in those states. In normal circumstances, a taxpayer who commutes from one state to a different state would have to file in both states and claim a credit against their home state’s tax obligations. For example, an Indiana resident who commutes to work in Ohio would pay tax on their income earned in Ohio, then claim a credit for taxes paid to Ohio against their Indiana individual income tax obligations. His employer would need to withhold income tax on behalf of both Ohio and Indiana in the same manner.
However, because Indiana and Ohio have an individual income tax reciprocity agreement, the tax filing process is far simpler. The Indiana resident does not need to file an Ohio return, and his employer does not need to withhold income tax on behalf of Ohio. Instead, he simply files an Indiana tax return and his income is taxable there only. The entire process is far simpler.
This works perfectly where the number of commuters traveling in each direction is roughly similar. But that does not mean that there is no place for reciprocity when commuters primarily flow in one direction. States can and have entered into revenue-sharing agreements — in essence, the state that has more residents traveling to the other state pays the other state the income tax revenue it is losing from the agreement. The net effect on revenue for both states is roughly the same as if the reciprocity agreement was not in place, but the simplification benefits for taxpayers remain.
There are two ways that legislators can allow their state to enter into reciprocity agreements — automatic reciprocity and manual reciprocity.
Automatic Reciprocity
Under automatic reciprocity, the state extends an offer of reciprocity to any other state willing to provide like treatment to its own residents. For example, Indiana, which has enacted this into law, does not assess individual income tax on nonresidents from any state that likewise will not assess individual income tax obligations on Indiana residents. The advantage of this approach is that it makes reciprocity agreements far easier to create.
Language for this approach would look like this:
SECTION 3.
- The tax imposed by [reference state statute] on income derived from sources within the state of [state] by persons who are nonresidents of this state, shall not be payable if the laws of the state or territory of residence of such persons, at the time such income was earned in this state, contained a reciprocal provision by which residents of this state were exempted from taxes imposed by such state on income earned in such state.
Manual Reciprocity
Alternatively, under manual reciprocity, the legislature delegates authority to the head of their revenue department to pursue and enter into reciprocity agreements with the heads of revenue departments in other states. The disadvantage of this approach is that it relies on the initiative of the state’s revenue department head to go to the effort to seek out these agreements and enter into them. It is less likely than automatic reciprocity to result in agreements with other states.
Language for this approach would look like this:
SECTION 3.
The [Revenue Department] may enter into an agreement with another state to exempt residents of the other state who earn income in this state from the tax levied under [reference income tax statute] if the other state has a provision in its tax laws that provides an income tax exemption to [state] residents.
The remaining language concerns severability and effective date.
SECTION 4.
- This act becomes operative for all taxable years beginning or deemed to begin on or after January 1, 202X.
SECTION 5.
- If any provision of this act, or the application of such provision to any person or circumstance, is held to be unconstitutional, then the remainder of this act, and the application of the provisions of such to any person or circumstance, shall not be affected thereby.
An example of what this package would look like in totality is below.