Employers generally must withhold income taxes on behalf of employees based on where the employee works. Typically this determination is simplified by the location of the employer’s offices. The COVID-19 pandemic and corresponding stay-at-home orders have altered the working situations for most Americans. Only time will tell what things will look like moving forward. Employers must now consider the impact of employees working remotely and confirm that income tax withholding is properly executed given these unprecedented circumstances.
Illinois recently issued an informational bulletin reminding employers of withholding obligations and how such matters may be impacted by employees working from home. Specifically, the bulletin states that employee compensation is subject to income tax withholding in Illinois when the employee has performed normal work duties in Illinois for more than 30 working days. If an Illinois resident employee meets this working day requirement for an out-of-state employer, the employer may be required to register with the Illinois Department of Revenue and withhold Illinois income tax from the employee.
Notably, the bulletin is not intended to impact (1) out-of-state employers from states that have reciprocal agreements with Illinois (Iowa, Kentucky, Michigan, Wisconsin), and (2) out-of-state employers who are already registered as a withholding agent in Illinois. Further, Illinois will waive penalties and interest for out-of-state employers who fail to withhold Illinois income taxes for Illinois employees where the sole reason for the withholding obligation is that the employee is working from home due to the COVID-19 pandemic.
Employer wage withholding rules and thresholds vary by jurisdiction. For instance, Ohio typically permits an employee to perform services on a temporary basis up to 20 days per year in a municipality before triggering the relevant income tax withholding provisions of the municipality. If an employee does not meet the 20-day threshold in a particular city, no withholding obligation arises with respect to that municipality. If an employee does not meet the threshold for any secondary municipalities, the employer will only have a withholding obligation based on the employee’s principal place of work. For employees that commute to a different municipality from the municipality where their former principal work location was based, or who work from their home which is not located in the same municipality as their former principal work location, the new remote working environment likely would have shifted an employer withholding obligation to the remote work location. However, as part of Ohio’s COVID-19 relief legislation, the new law effectively locks in the cities where municipal income taxes were owed, based on the employee’s principal place of work, for the duration of the declared pandemic emergency. This new rule will expire 30 days after the emergency declaration is lifted by Ohio Gov. Mike DeWine, so employers should be mindful of the emergency designation and potential altered withholding obligations going forward.
It is important to consider the changing professional landscape in the context of an employer’s withholding tax obligations, as new work environments could require significant updates to employers’ practices in the area. Please reach out to Porter Wright if you have any questions regarding your potential new obligations in this new working environment.