Our economy is increasingly mobile — and the tax code needs to adapt.

The taxation of mobile workers has been a significant compliance challenge for the business community for many years. However, with ever greater mobility in our workforce, this issue has evolved from a niche tax challenge to one with wide-ranging impacts for workers and the business community at large. Our world’s newfound work location flexibility increases the number of workers and employers who are affected by onerous nonresident income tax rules by orders of magnitude.

States require employers to track their employees’ locations and withhold income taxes accordingly. But states impose a patchwork of withholding requirements — some dependent on the number of days an employee is in a state, and some requiring complex calculations of wages earned in-state. Employers must incur extraordinary expenses in their efforts to comply with states’ widely divergent rules — and nearly half the states require them to withhold after the employee has worked there for only one day. On top of these complicated withholding rules, employees may also be legally required to file an income tax return in every state to which they travelled. In some cases, requirements for employees and employers aren't even the same. It’s an administrative nightmare for workers, businesses, and states alike.

Most states have onerous one-day requirements

Nearly half of the states have very unfriendly laws when it comes to the tax treatment of mobile workers and their employers. Twenty-one states require an employer to withhold on the first day an employee works within the state (dark maroon on the map). New York requires an individual to file on the first day even if the employer isn’t required to withhold on the first day. These one-day thresholds are not only onerous for both employees and employers to comply with, but are inefficient for states to administer. Other states have slightly higher day thresholds, ranging from 2 and 14 days, or have wage-based thresholds (light maroon on the map). Wage-based thresholds are often quite low.

States Should Strive for Thresholds of 30 Days or More

A handful states have very friendly nonresident state income tax systems. For example, Arizona, Hawaii, Illinois, Indiana, Montana, and West Virginia all have thresholds of 30 days or more. Thresholds of 30 and 60 days are more fair for workers and employers, and ensure that those doing reasonable business within the state are contributing to state tax revenue. Click here to read more about states with favorable tax environments for mobile workers and their employers.