To address the complexity of state income tax for mobile workers, U.S. Senators introduced the Mobile Workforce State Income Tax Simplification Act of 2019.
The act would create a nationwide standard for the taxation of mobile workers.
A substantially similar bill passed the U.S. House of Representatives in 2017.
State Taxing Authority Limitation
The act states that wages and remuneration earned by an employee working in more than one state will only be subject to income tax in the state:
- of the employee’s residence; and
- where the employee is present and performing employment duties for over 30 days during the calendar year.
Current State Taxing Authority
States can tax any income earned in the state. The states have each adopted their own standard for taxing nonresident employees.
Some states tax income, and require filing, when a nonresident works in a state for as little as one day. Other, states have adopted a set number of days a nonresident must work in the state before taxation. As an example:
Some states require that nonresidents must earn a certain amount of income before imposing tax:
- Georgia, once income exceeds the lesser of 5% of all income for services or $5,000;
- Minnesota, once the minimum filing threshold is crossed; and
- Oregon, once income exceeds the standard deduction.
There are also exceptions. States may not require a nonresident to pay tax if:
- the state has a reciprocity agreement with another state; or
- the nonresident is in the state for disaster recovery work.
Reciprocity agreements are made between individual states. Under the agreements, nonresidents earning compensation in a state do not pay income tax if they are taxed in their home state.
For example, Pennsylvania has reciprocity agreements with:
- New Jersey;
- Virginia; and
- West Virginia.
Alternatively, if the taxpayer is a Pennsylvania resident and works in any of the “reciprocal-agreement” states, the taxpayer pays income tax to Pennsylvania.
Disaster Recovery Work Exemptions
Many states exempt out-of-state companies that enter the state to perform disaster recovery work from many taxes. The work must be performed:
- in response to a state disaster or emergency; and
- during the disaster response period.
The exemptions apply to a range of taxes including withholding and personal income taxes.
Nonresidents traveling into a state for work need to research taxability each time they work in a new state. Complying with all these different requirements is not simple. The act would simplify compliance for mobile workers.
Under the act, employers will not need to withhold state income tax unless an employee is in a state for more than 30 days. In a state where the employee meets the 30-day threshold, withholding and reporting requirements would apply on the day employment began in the state.
Current Withholding Requirements
State withholding requirements vary. Most states require withholding on nonresident’s wages earned in the state on the first day. Other states set specific thresholds, do not require withholding, or do not impose an income tax.
Sometimes the thresholds for withholding are like those imposed on taxpayers. However, they can also differ.
In Hawaii withholding does not apply to nonresident employees unless they work in state over 60 days. However, nonresidents must file tax returns when their gross income exceeds the amount of personal exemptions and the standard deduction.
There are also exceptions to withholding for nonresidents. As an example, Arizona has exceptions from withholding for nonresidents if they:
- engaged in motion picture productions in Arizona;
- are employed by an individual, fiduciary, partnership, corporation or limited liability company having property, payroll and sales in Arizona, or of a related entity that has more than 50% direct or indirect common ownership;
- are physically present for less than 60 days;
- are working for common carriers paid for service performed both in and outside the state; and
- can claim credit for tax paid to the state of residence.
The act would allow states to define an “employee.” However, the term “employee” will not include:
- professional athletes;
- professional entertainers;
- qualified productions employees; or
- certain public figures.
Having a nationwide standard would make it easier for employers to comply with state withholding requirements.
Senators introduced the bill February 28.
The bill has 34 cosponsors:
- 16 Republicans; and
- 18 Democrats.
The bill was referred to the Senate Committee on Finance.
Andrew Soubel, J.D.