With many companies having a remote workforce for most of 2020, there are a lot of questions around the state tax treatment for employees working from home. Each state handles their withholding differently, but below we discuss how Illinois, Missouri and St. Louis income tax withholding is currently treated at the state and local level.
Illinois Income Tax Treatment
In general, Illinois withholding is based on where the employee is working. Below is an outline of common questions and answers around Illinois income tax withholding, according to the Illinois Department of Revenue (DOR) Publication 130.
When are companies required to withhold Illinois income tax from an employee’s paycheck?
Employers must withhold Illinois income tax when federal income tax is withheld from compensation. Compensation is paid in Illinois when the employee’s services are “localized” in Illinois. This statement applies to all individuals except qualifying residents of Iowa, Kentucky, Michigan, and Wisconsin and military spouses.
When is compensation considered paid in Illinois?
The following are general rules for when compensation is paid in Illinois for tax reasons.
- If all of an employee’s services are performed in Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
- If some of the employee’s services are performed outside Illinois, but the services outside Illinois are incidental to the services performed inside Illinois, then compensation is considered paid in Illinois and subject to Illinois income tax withholding.
- If the employee is an Illinois resident and neither of the rules above apply and no other state’s taxes are withheld, then compensation is considered paid in Illinois and is subject to Illinois income tax withholding.
- If the employee’s compensation is not localized to any state under any of the rules above and the employee performs significant service within Illinois for more than 30 working days, and the service performed within Illinois is nonincidental to the employee’s service performed outside Illinois, then a portion of compensation is considered paid in Illinois and subject to Illinois income tax withholding. The portion of compensation subject to Illinois withholding equals the total compensation paid to the employee multiplied by a fraction equal to the number of working days the employee spent within Illinois during the year divided by the total working days of the year.
What is considered incidental?
The Illinois DOR defines “incidental” as any service which is necessary to or supportive of the primary service performed by the employee or which is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual’s normal occupation as long as it is performed within the same employer-employee relationship.
An employee who normally performs all of their service in Illinois may be sent by their employer to another state to perform services which differ from their usual work, or they may be sent to do similar work. As long as the service is temporary or consists merely of isolated transactions, it will be considered to be incidental.
What is considered a working day?
The Illinois DOR defines “working days” as all days during the tax year in which the individual performs duties on behalf of his or her employer. Days in which the individual performs no duties on behalf of his or her employer, such as weekends, vacation days, sick days, and holidays, are not working days.
A working day is spent within Illinois if:
• The individual spends a greater amount of the day performing services on behalf of the employer within Illinois rather than not, without regard to time spent traveling, or
• The only service the individual performs on behalf of the employer on that day is traveling to a destination within Illinois, and the individual arrives on that day.
Example: Jane is a Missouri resident who earned $70,000 in wages from her employer for the tax year. During the year, she performed services for her employer for 40 days in Illinois out of 250 total working days for the year. Accordingly, 16% (40 working days divided by 250) of Jane’s wages, or $11,200, was paid in Illinois and is subject to Illinois income tax withholding.
When are employers not required to withhold Illinois income tax?
According to the Illinois DOR, unless you enter into a voluntary withholding income tax agreement, you are not required to withhold Illinois income tax from the following:
- Compensation paid to residents of Iowa, Kentucky, Michigan, and Wisconsin, due to reciprocal agreements with each of these states, and certain military spouses;
- Compensation paid to a non-resident employee who has performed less than 31 days of service in Illinois and whose compensation is not localized in Illinois
- Compensation paid to a non-resident employee whose service is performed entirely in another state;
- Compensation paid to an Illinois resident whose service is performed entirely in another state, and the compensation is subject to withholding in another state;
- Other specific situations as described in Illinois Department of Revenue Publication 130
If an employee lives in another state, are employers required to withhold income tax for that state?
If your employee is “paid in Illinois” and is a resident of Iowa, Kentucky, Michigan, or Wisconsin, you may, but are not required by Illinois law, withhold income tax for the other state. If your employee is a resident of a state with whom Illinois does not have a reciprocal agreement (i.e., Missouri), you must withhold Illinois income tax on all income that is paid in Illinois. You may be required to withhold tax for another state in which the employee works or resides. Contact those states to determine if you are required to register as a withholding agent.
Missouri Income Tax Treatment
Missouri income tax treatment is a bit simpler for remote employees than Illinois. According to the Missouri Department of Revenue (DOR), any time an employee is performing services for an employer in exchange for wages in Missouri, those wages are subject to Missouri withholding. This applies to remote workers where an employee is located in Missouri. This rule also applies when the employer instructs the employee not to work but the employee is still being paid.
If you have employees performing services for wages in Missouri, those wages are subject to Missouri withholding, regardless of where you as the employer are located.
Earnings Tax Treatment in St. Louis
According to the St. Louis Collector of Revenue, employees who have been working remotely due to COVID-19 or in conjunction with the acting City of St. Louis Health Commissioner’s Order should be treated as working at their original, principal place of work for earnings tax purposes.
The acting Health Commissioner’s Order required all non-exempt City of St. Louis employers to “facilitate employees working remotely” but is completely neutral to the location of the remote work site. It does not order employees to work outside the City nor require any individual who is employed outside the City, to work remotely in their City Home.
Employers in the city of St. Louis should continue to withhold on those employees in the same manner as they did prior to the temporary relocation of their employees.
Under these circumstances, days worked out of the city due to a temporary reassignment caused by COVID-19 or the acting Health Commissioner’s Order may not be included in the Non-Residency Deduction formula on Form E-1R when claiming a refund for tax year 2020.
Due to the COVID-19 remote working environment, state and local tax withholding is complicated and changes or clarifications can be made at any time. Contact an Anders advisor below to discuss your specific tax situation.