Utah Senate Bill 39, Mobile Workforce Income Tax Amendments, was signed into law by the governor last month. The terms of the legislation closely follow the model proposed by the Multistate Tax Commission (MTC), with an effective date applicable to tax years beginning on or after January 1, 2023.
Consistent with the MTC model, the bill provides for a threshold of 20 days before an eligible nonresident employee’s income earned in Utah would be subject to income tax. No withholding would be required for employees working in the state for 20 days or less. Nonresidents are eligible for this protection if they have no other Utah-sourced income for the year and reside in a state that provides a “substantially similar exclusion” from income tax for nonresident employees working in their state, or alternatively, their resident state has no individual income tax.
The bill also provides exclusions for some employees, such as professional athletes, professional entertainers, construction workers, “an individual of prominence who performs services for wages on a per-event basis,” and highly paid key employees of the business.
The Council On State Taxation (COST) was a critic of this legislation because it contrasts with the model it developed with the American Institute of Certified Public Accountants. The COST model provided for a 30-day threshold before withholding is required for nonresident employees. To date, three states—Illinois, Louisiana, and West Virginia—have adopted the COST model, whereas North Dakota is the only other state to adopt the MTC model. Because of the inherent conflicts in the terms, employees who are residents of a state using the MTC model would receive no benefit working in a state using the COST model, and vice versa.
COST also questions the expected compliance with terms such as determining who is an ineligible key employee by tracking annual compensation to establish required withholding. The legislation follows the IRC pension top-heavy rules of section 416(i), by defining a key employee as an individual earning in excess of $130,000 annually. This is a burdensome qualification term that could impede compliance.
These withholding changes are coming at a time when some states still have emergency rules in place that were implemented at the beginning of the pandemic to provide relief to employers. One such state—South Carolina—has proposed an expiration of these streamlined withholding requirements that would be effective June 30, 2022 if the draft ruling is finalized. The expiration of this relief would mean that the Department of Revenue would once again seek to impose nexus for any temporary changes in workers’ locations that give rise to an income tax liability.
We will keep you updated as more states enact rules to accommodate the remote workforce that has rapidly evolved in the past few years.
TECHNICAL INFORMATION CONTACTS:
Mark L. Nachbar
Principal
Ryan
630.515.0477
mark.nachbar@ryan.com
Mary Bernard
Manager
Ryan
401.272.3363
mary.bernard@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
- Topics
- Mark L. Nachbar
- Income Tax
- Utah