As a result of the COVID-19 lockdowns, remote work has been surging. According to the United States Census Bureau, the number and percent of home-based workers more than tripled between 2019 and 2021, from 5.7% (roughly 9 million workers) to 17.9% (about 28 million workers). Consequently, this trend towards remote work needs the proper policy actions by policymakers to allow these employees to both thrive in their positions and incentivize them to work in the state. As remote-based companies grow, they need to have the assurance that the states their employees reside in are well suited for their sector of work.
There is a great administrative advantage for employers to have the option to choose from job candidates all around the country without experiencing hesitations around state’s tax policies. One of the areas of policy involved is an income tax obligation or withholding threshold.
This is the limit that employees must exceed in a state before they are either liable to pay the state income tax, or employers are required to withhold income taxes on the employees’ behalf. Around the country, states have been looking at ways to increase this threshold to make their state attractive for remote and nonresident employees to work out of. Idaho should follow suit.
As it stands in Idaho, a nonresident employee must make $1,000 while in Idaho, to have their employer withhold their income tax for the state. While this policy is mainly associated with remote workers, it also affects those who engage in frequent business travel, and those who desire to work in a hybrid model in a different state.
As Charlie Kearns from the National Conference of State Legislators explains:
“Several states adopt bright-line withholding thresholds, although they vary by state. While the states’ nonresident withholding thresholds predominantly apply to ordinary business travel, the thresholds also impact taxation of a remote worker’s wages when an employer permits employees to work from anywhere, such as during an out-of-state vacation or at a relative’s home for a short, temporary period (for example, two weeks)”
Manish Bhatt, Senior Policy Analyst at Tax Foundation, notes:
“By now, we are accustomed to the increased mobility of the workforce. Unfortunately, many state tax codes have not caught up. In fact, some states impose tax withholding and filing obligations on nonresident workers that spend as little as one day in the state. Further, surprisingly few states have reciprocity agreements which help protect residents from double taxation for time spent elsewhere. Raising the thresholds for tax withholding and filing and considering reciprocity agreements between states are commonsense reform options.”
One of the biggest hurdles in this transition towards remote-based working has been the economic policies surrounding income tax at the state level.
As the National Taxpayers Union Foundation explains:
“Tax policies play a major factor in residency decisions, and remote work will likely accelerate tax migration. States can either resist the trend and bleed taxpayers or embrace it and work to become competitive.”
Several states are acting to reform their nonresident income tax thresholds. In May of 2023, Montana passed a 30-day threshold for income tax liability. HB 447 states that:
“Compensation that is received by a nonresident for employment duties performed in this state, is excluded from Montana source income if: The nonresident is present in this state to perform employment duties for not more than 30 days during the tax year in which the compensation is received, where presence in this state for any part of a day constitutes presence.”
The National Taxpayers Union Foundation (NTUF) has developed the ROAM Index to rank how every state treats remote workers through its tax and regulatory policies. The index considers five factors while calculating its score. They consider a filing threshold which is the period a taxpayer must work in a state before the taxpayer must file an income tax return in that respective state. The NTUF has the highest value for states that require taxpayers to file in-state only after they work more than 30 days in that state, not calculating equivalent days worked based on a wage threshold.
Idaho currently holds a ROAM score of 10.66 out of 35 and is ranked 24th in the country. Asked about Idaho moving to a 30-day filing threshold, NTUF told MSPC:
"By instituting 30-day filing and withholding thresholds, Idaho has an opportunity to become the 2nd-highest scoring state on the ROAM Index among states with an individual income tax, right ahead of Montana. Idaho has a chance to be a big winner in the remote work revolution, and it shouldn't let its tax code be an impediment.”
While the issue of income tax relating to nonresident workers is treated differently throughout the country, Idaho should consider moving to a 30-day income tax obligation threshold. The state needs to both encourage remote and nonresident workers to operate in Idaho and ensure that employees aren’t taking advantage of a tax loophole.
A 30-day threshold would accomplish both. A wage threshold proves to be very complicated in the case of an employer with employees in multiple states. The employer must take all the specific wage thresholds into consideration while making hires and sending employees to other states for meetings, conferences, and other forms of business engagement.
A wage threshold also disincentives entrepreneurs from organizing events like business conferences. If the organizers know they will be obligated to pay the income tax within a given state if they exceed a certain compensation level, they will simply relocate to a state where they wouldn’t be penalized in.
The 30-day mark provides adequate time for nonresidents to collaborate with residents while participating in the local economy. The current threshold standard of $1,000 earned in Idaho is lacking compared to the 30-day-specific direction that states like Montana are following.