The pandemic ushered in many changes to American life, to the degree that the tax changes it brought were not initially at the forefront of taxpayers’ minds. But with remote work seemingly here to stay, taxpayers are now having to grapple with the fact that while remote work offers new opportunities and detaches workers from having to live in areas just because of job opportunities, it also means changes to tax obligations.
Unfortunately, they’re finding that not all states’ tax codes avoid creating unnecessary complications. Illinois is well-positioned to attract remote workers in the new economy, but with small policy changes, Illinois could be the No. 1 state in the country for remote workers.
Remote workers already find Illinois hospitable for many reasons — first and foremost, the state’s gold-standard withholding threshold of greater than 30 days. Withholding thresholds represent the number of days a taxpayer can work or amount of income a taxpayer can earn in-state before an employer is required to withhold income taxes on their behalf.
For businesses with mobile employees spending a short amount of time in many states, low withholding thresholds can result in tax compliance obligations piling up. Illinois’ high threshold ensures that out-of-state businesses don’t need to tell their employees to avoid spending a short time working in Illinois to avoid tax compliance burdens from piling up.
Illinois also does moderately well with its number of reciprocity agreements. Reciprocity agreements are agreements between states to require taxpayers who commute across state lines to pay only taxes to their state of residence. These agreements protect taxpayers from being caught in a tax tug-of-war between their state of residence and the state they commute into and facing the consequential potential for double taxation.
The Prairie State has reciprocity agreements with Iowa, Kentucky, Michigan and Wisconsin. However, combined, these agreements exempt a little more than a third of all incoming commuters. Illinois should seek out more impactful reciprocity agreements with high-traffic neighbors like Ohio and Indiana.
In fact, even better than a push focused on these two states would be an effort to enshrine into law a unilateral offer of reciprocity to any state that returns the same treatment to Illinois taxpayers. Not only would this make the state more attractive to other states’ remote and mobile workers, but it would also encourage other states to limit tax compliance burdens on Illinois taxpayers. It’s worth noting that nearby states like Indiana, Minnesota and Wisconsin already do this.
The biggest area of improvement available to Illinois is on filing thresholds. Filing thresholds are similar to withholding thresholds, representing the number of days a taxpayer can work or amount of income a taxpayer can earn in-state before being required to file an individual income tax return. Note that “earning income in-state” can represent anything from being a contractor who does a job in a state to a remote worker working from a family member’s house while visiting.
Illinois has a wage-based threshold, but it is prorated based on income earned anywhere. Functionally, this means that any taxpayer who earns any income in Illinois is technically obligated to file on day one of working in Illinois. This burdensome and counterintuitive rule makes Illinois a state to avoid spending a short time working in at all costs. The state would be far better off simply using the same threshold it uses for withholding for filing as well.
In the Remote Obligations and Mobility (ROAM) Index, which ranks states on how their tax codes affect remote and mobile workers, Illinois comes in with the third-highest score of any state that levies an individual income tax. With minor reforms, Illinois can further improve on how it treats remote workers.
While Illinois could improve, it is still better positioned than nearly every other state with an individual income tax to welcome remote workers. Some minor improvements to its tax code could really set the state apart as a place remote and mobile employees want to go to and — just as importantly — don’t have to avoid.
