Was Illinois withholding for a nonresident who worked 80% in Illinois automatically limited to 80% of wages?

Plain-English summary

Illinois withholding was not automatically limited to the 80% of workdays spent in Illinois. The source of a nonresident employee's compensation depended on the statutory localization tests, not a mechanical workday allocation.

If the 20% of service outside Illinois was incidental to the Illinois service, the employee's entire compensation was paid in Illinois. All wages could also be Illinois compensation when Illinois was the employee's base of operations or, if there was no base, the permanent place from which the service was directed or controlled.

IDOR explained that the rules were generally designed so compensation would be paid to a particular individual in only one state. The employee's full facts therefore had to be analyzed before determining withholding.

What this means for you

Do not program Illinois withholding as an automatic Illinois-workday fraction. First test localization and incidental duties, then base of operations, then direction or control, along with residence and reciprocity.

Common questions

Q: Did 80% Illinois work always mean withholding on 80% of wages?
A: No. All wages could be Illinois compensation under the incidental-work, base-of-operations, or direction-and-control tests.

Q: Could a nonresident's Illinois base of operations source all compensation to Illinois?
A: Yes, even when the employee worked in multiple states.

Citations and references

• 35 ILCS 5/304(a)(2)(B)
• 35 ILCS 5/701(a), (b)
• 86 Ill. Adm. Code 100.7010(c)-(e)
• Illinois Publication 130

Subject

Withholding – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100015.pdf

Original ruling text

IT 10-0015-GIL 06/28/2010 WITHHOLDING – OTHER RULINGS
General Information Letter: A general explanation is provided of the principles for
determining when compensation paid to an employee providing services within and
without Illinois is subject to withholding.
June 28, 2010
Dear:
This is in response to your letter dated May 6, 2010 in which you state the following:
COMPANY, Inc. (COMPANY) develops payroll-related software products that allow employers
to calculate, report and remit federal, state and local payroll taxes.
Recently, we reviewed the Illinois Publication 130, regarding withholding for compensation
paid in Illinois.
On page 6, question ‘Am I required to withhold income tax for another state if my employee is
not an Illinois resident?’ The answer provides if there is no reciprocal agreement, then you are
required to withhold Illinois Income Tax on all income that is paid in Illinois.
Does this mean 100% of the income paid to the employee? Or, the percentage of wages
earned in Illinois?
An example, the employee is a resident of Connecticut, but works 80% in Illinois and 20% in
another state. What should be withheld? Should 100% of wages or 80% of wages be taxed in
Illinois?
We hope that you will provide an interpretation of the withholding regulation for nonresidents
working in Illinois State.
According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2
Ill.Adm.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.
Section 701(a)(1) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/101 et seq.) governs withholding
requirements for nonresidents and states:
(a) In General. Every employer maintaining an office or transacting business within this State
and required under the provisions of the Internal Revenue Code to withhold a tax on:
(1) compensation paid in this State (as determined under Section 304(a)(2)(B) to an
individual); or
(2) payments described in subsection (b) shall deduct and withhold from such
compensation for each payroll period (as defined in Section 3401 of the Internal
Revenue Code) an amount equal to the proportionate part of this withholding exemption
(computed as provided in Section 702) attributable to the payroll period for which such

IT 10-0015-GIL
June 28, 2010
Page 2
compensation is payable multiplied by a percentage equal to the percentage tax rate for
individuals provided in subsection (b) of Section 201.
(b) Payment to Residents. Any payment (including compensation to a resident by a payor
maintaining an office or transacting business within this State (including any agency,
officer, or employee of this State or of any political subdivision of this State) and on which
withholding of tax is required under the provisions of the Internal Revenue Code shall be
deemed to be compensation paid in this State by an employer to an employee for the
purposes of Article 7 and Section 601(b)(1) to the extent such payment is included in the
recipient’s base income and not subjected to withholding by another state. Notwithstanding
any other provision to the contrary, no amount shall be withheld from unemployment
insurance benefit payments made to an individual pursuant to the Unemployment
Insurance Act unless the individual has voluntarily elected the withholding pursuant to rules
promulgated by the Director of Employment Security.
Regarding “compensation paid in this state,” IITA Section 304(a)(2)(B) provides:
Compensation is paid in this State if:
(i)
the individual’s service is performed entirely within this State;
(ii)
the individual’s service is performed both within and without this State, but the service
performed without this State is incidental to the individual’s service performed within this
State; or
(iii)
some of the service is performed within this State and either the base of operations, or if
there is no base of operations, the place from which the service is directed or controlled
is within this State, or the base of operations or the place from which the service is
directed or controlled is not in any state in which some part of the service is performed,
but the individual’s residence is in this State.
In the example you provide, a Connecticut resident employee works 80% in Illinois and 20% in
another state. You indicate that either 100% of the wages or 80% of the wages would be taxed in
Illinois. The application of our laws is not so simple and requires more analysis into the facts and
circumstances of each individual. Using your example, if 20% of the work performed in another state
was “incidental” to the individual’s service performed within Illinois, the individual’s entire
compensation would be subject to Illinois withholding.
There are more factors to consider than simply the localization test as described in 86 Ill.Admin.Code
Section 100.7010(c). Section 100.7010(d) discusses the importance of “base of operations” and
Section 100.7010(e) describes “place of direction or control.” In other words, a nonresident whose
“base of operations” is in Illinois will be subject to Illinois withholding on all compensation despite
working in various states. This is true also when Illinois is the permanent “place of direction or
control” of a nonresident employee working in multiple states. As you may observe, the provisions of
IITA 304(a)(2)(B) are designed to apply in such a manner that under them, compensation can
generally be paid to a particular individual in only one state. An explanation of the above information
is summarized on page 5 of the Illinois Publication 130 which you refer to in your letter.
Please keep in mind this is a general information letter which does not constitute a statement of policy
that either applies, interprets or prescribes tax law. It is not binding on the Department. Should you
have additional questions, please do not hesitate to contact our office.

IT 10-0015-GIL
June 28, 2010
Page 3
Sincerely,

Heidi Scott
Staff Attorney -- Income Tax