Submitted by Joel Shabsin, CPA

It looks like the Illinois Department of Revenue is beginning to issue Bulletins related to the Corona Virus pandemic and tax regulations. On May 20th they issued Bulletin 2020-29, entitled Illinois withholding requirements for out of state employers who employ Illinois residents
working from home due to COVID -19 Virus outbreak.

The bulletin states that if an Illinois resident has performed work for more than 30 working days from their home in Illinois for an out of state employer, the employer may be required to register with the Illinois Department of Revenue and withhold Illinois income tax from the
employee. The withholding requirement does not apply to employers in states that have a reciprocal agreement with Illinois (Iowa, Kentucky, Michigan and Wisconsin) but does apply to businesses in Indiana and Missouri along with any of the other 43 states.

Before the pandemic changed working arrangements, Illinois residents who worked in Indiana or Missouri for out of state employers were not subject to Illinois tax on the wages they earned out of state and most did not work from locations in Illinois. Now with many people working from home their Illinois residences are their workplace and they are subject to Illinois Income tax on the earnings they receive while working in Illinois if they end up working from home more than 30 days during the year.

If you have out of state clients who have Illinois residents as employees and those individuals are working from their homes in Illinois for 30 days or more in 2020, those businesses need to register with IDOR and withhold Illinois taxes for the periods their employees worked in Illinois.

Under Illinois law, out of state employers are supposed to keep track of the number of days their employees work in Illinois and apportion their wages between the time they worked in the employer’s state and the time they worked in Illinois. The employer is supposed to report Illinois wages for Illinois residents on their W-2 each year and the employee is required to file
an Illinois tax return for their Illinois wages shown on their W-2.

For detailed information about withholding requirements take a look at Illinois Department of Revenue Publication 130. There are several pages that discuss the 30 day rule and give examples of how to calculate Illinois income.

IDOR claims that they will waive penalties and interest for out of state employers who fail to withhold Illinois taxes for Illinois employees where the sole reason for the withholding obligation is that the employee is working from home due to the COVID-19 pandemic. However, Illinois residents that do not have Illinois income tax withheld while working in Illinois could owe Illinois taxes on their Illinois source income and may be subject to estimated tax payment requirements along with penalties and interest on unpaid amounts.

Over the next several months, Illinois will need to make numerous decisions related to federal tax law changes that came about as a result of the CARES Act. For example, the CARES Act allows businesses to carry back net operating losses from 2018 and 2019 for 5 years and receive a refund of taxes paid in those years even though the years are closed. How will Illinois handle this situation? Will Illinois follow the Federal change for QIP in the CARES Act or decouple from the change? What about loan forgiveness and grants received under the CARES Act? What about the Economic Impact payment all taxpayers are supposed to receive federally tax free? Will Illinois require these to be added back to Federal income and be taxable by Illinois?

With the current financial picture in Illinois looking bleaker every day what will the state do to close the budget gap? At this point in time, your guess is as good as mine. IAAI will be monitoring changes at the state level and reporting them through continuing news flashes biweekly or more often if needed. This is a major benefit you get for being an IAAI member.