Article written by:
Sara Goldhardt, CPA
State and Local Tax Director
It is estimated that nearly 60 million people in the United States participate in the gig economy, and this number is increasing annually. In a gig economy, temporary and flexible jobs are commonplace, and companies tend to hire freelancers and independent contractors instead of full-time employees.
For companies with traditional full-time employees, the current workforce is anything but traditional. Given advancements in technology, employees do not always need to be in the office from 9 to 5. They can work at home, in a nearby coffee shop, or on an airplane. Some companies now have workforces that are entirely remote.
Now, as a result of these massive workforce trends, federal and state taxing jurisdictions are reviewing their laws and regulations to figure out what, if any, changes need to be made on the employment tax front.
Employers with a mobile workforce often struggle in determining to which states they need to withhold income tax when nonresident employees perform services in those states. As a result of this complexity, we have seen the re-emergence of the Mobile Workforce State Income Tax Simplification Act in Congress. If enacted, S.604 would simplify multistate taxation by establishing a 30-day threshold before a state could impose income tax on a nonresident employee’s wages.
In August, the state of Illinois took action and established its own 30-day threshold with the passage of SB1515. Under this bill, effective January 1, 2021, nonresident employees are subject to Illinois income tax only if they work 30 or more days within the state.
Many employers hope that the passage of a federal Mobile Workforce bill will provide uniformity across all states on the taxation of nonresident employees.
The states are also instituting tax changes related to independent contractors. In North Carolina, effective January 1, 2020, the state has expanded its requirement to withhold state income tax from certain non-wage compensation recipients. In California, a new law effective January 1, 2020, imposes a stricter standard for classifying workers as independent contractors. This controversial bill, AB 5, is seen as a response to the growing gig economy. AB 5 will likely have a significant impact on companies across the United States, not just in California.
Given the ever-changing landscape of the U.S. workforce, it’s important for employers to be aware of all of these changes and how they may impact their employment tax responsibilities. For more information and analysis on how the above changes may impact your business, contact your GBQ SALT Employment Tax team.