MTC Proposes Measures to Simplify State Income Tax Withholding for Mobile Employees

The Multistate Tax Commission’s (MTC) Executive Committee has approved a Model Mobile Workforce Statute which would limit an employer’s obligation to withhold state income taxes when it sends employees into a state for a limited time. Under current law, many businesses face the burden of withholding another state’s income tax from an employee’s compensation when sending the employee into another state for business purposes, even for only a few days. This places cumbersome compliance requirements on employers. While Congress has approached the issue in H.R. 3359 and H.R. 2110 (Mobile Workforce State Income Tax Fairness and Simplification Act), neither bill came to a vote. The MTC addresses this problem by offering states a model law – the Model Mobile Workforce Statute – in order to simplify state income tax withholding obligations.

For example, if an Ohio-based employer sent an employee to Illinois on a two day sales call, that employee would owe out-of-state income taxes for income earned in Illinois and the employer would likely be required withhold the out-of-state’s income taxes from the employee’s compensation. As this is presumably happening in both directions – i.e. an employer in Illinois is similarly sending employees to Ohio – both states could retain their tax revenues, while reducing the burden on the employers, by simply taxing the employees’ income in their state of residence.

The MTC Model Mobile Workforce Statute would excuse an employer from withholding out-of-state income tax from a nonresident employee’s wages if the nonresident has no other sources of income within the state, the nonresident spends less than 20 days during the tax year in the state performing employment duties, and the nonresident’s state of residence provides a similar exception. Under the model statute, the employee would also be exempt from individual income taxes on his/her income earned from the limited presence in the state. Certain employees are excluded, however, including professional athletes, professional entertainers, certain employees who are compensated on a per-event basis, construction workers and certain “key employees.”

Notwithstanding the above, Ohio has already taken two measures to lessen an employer’s withholding tax obligations for an employee temporarily present in the state. First, Ohio has entered into reciprocity agreements with its five border states (Indiana, Kentucky, Michigan, Pennsylvania and West Virginia), whereby Ohio agrees not to impose its income tax on residents of the other state working in Ohio, and vice versa. These reciprocity agreements will cover employees permanently or temporarily working in Ohio, but the employer must have the employee complete form IT 4NR, Employee’s Statement of Residency in a Reciprocity State, and retain the same for its records. Obviously, this does not address employees traveling into Ohio from any non-border state. Second, Ohio has a low income credit for individuals with less than $10,000 of Ohio adjusted gross income less exemptions. R.C. 5747.056. Accordingly, an employer will not be required to withhold Ohio income tax from an employee’s salary or wages if the employee receives less than $10,000 of compensation in a year attributable to the employee’s temporary presence in Ohio (and the employee has no other Ohio based income).

Model Mobile Workforce Statute would further reduce these burdens. However, one must keep in mind that the MTC’s model laws are only recommendations for states to consider and that state laws on this issue vary.

If you have questions about how the MTC’s model statute might affect your tax liability, contact us today for more information.