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When is compensation paid in Illinois, and what are localized services?

Answer #207 -- ( Published 08/10/2005 09:28 AM | Updated 07/12/2017 10:39 AM )

When is compensation paid in Illinois, and what are localized services?

Compensation is paid in Illinois when the employee’s services are “localized” in Illinois. This statement applies to all individuals except qualifying residents of Iowa, Kentucky, Michigan, and Wisconsin and military spouses. If any of the following localization tests are met, compensation is paid in Illinois:

  • The employee’s service is localized in Illinois because all of the service is performed in Illinois.
  • Some of the employee’s services are performed outside Illinois, but the services outside Illinois are incidental to the services performed inside Illinois. The term “incidental” means any service which is necessary to or supportive of the primary service performed by the employee or which is temporary or transitory in nature or consists of isolated transactions. The incidental service may or may not be similar to the individual’s normal occupation so long as it is performed within the same employer-employee relationship. That is, an individual who normally performs all of his service in Illinois may be sent by his employer to another state to perform service which is totally different in nature from his usual work or he may be sent to do similar work. So long as such service is temporary or consists merely of isolated transactions, it will be considered to be incidental. In every case, the ultimate determination to be made is whether the individual’s service was intended to be and was in fact principally performed within Illinois and whether any service which was performed in another state was of a temporary or transitory nature or arose out of special circumstances at infrequent intervals. The amount of time spent or the amount of service performed outside Illinois, in itself, should not be regarded as decisive in determining whether such service is incidental to service performed within Illinois.
  • The employee’s service is not localized in any state under either of the rules above, but some of the service is performed in Illinois, and either
    • the base of operations is in Illinois, (The term “base of operations” refers to the place or fixed center from which the individual works. An individual’s base of operations may be his business office (which may be maintained in his home), or his contract of employment may specify a place at which the employee is to receive his directions and instructions. In the absence of more controlling factors, an individual’s base of operations may be the place to which he has his business mail, supplies, and equipment sent or the place where he maintains his business records), or
    • there is no base of operations, but the place from which the service is directed or controlled is in Illinois. The permanent place from which the employee’s service is directed or controlled is relevant in determining whether wages are subject to withholding if the localization tests are not applicable and it is impossible to determine the base of operation for such individual. In such a case, if both the place from which the individual’s service is directed or controlled is within Illinois, and some of the service is performed within Illinois, then his entire compensation will be subject to withholding.
  • The employee’s service is not localized in any state under any of the rules above, but 
    • some of the service is performed in Illinois, 
    • 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, and 
    • the employee is an Illinois resident. Residence is a factor in determining whether compensation paid to an individual is subject to withholding only when his service is not localized within some state; he performs no service in the state in which he has his base of operations (if he has a base of operations); and he performs no service in the state from which his service is directed or controlled. In such case, if the individual is a resident of this State, and some of his service is performed within this State, his entire compensation will be subject to withholding.
  • For compensation for services performed by a nonresident as a member of a professional athletic team, the amount that is paid in Illinois is the total compensation for services performed for the team during the year, multiplied by a fraction equal to the number of duty days spent within Illinois by the total number of duty days spent performing services for the team. See Section 304(a)(2)(B)(iv) of the Illinois Income Tax Act for more guidance.

There are three limited exceptions when you are not required to withhold Illinois Income Tax if a localization test described above is met. These exceptions are described below.

  1. The employee works for an employer under the jurisdiction of the Surface Transportation Board (STB) and performs regularly assigned duties in more than one state. Although a localization test may be met, do not withhold Illinois Income Tax unless the employee is an Illinois resident. 
  2. The employee works on an aircraft for an air carrier and performs regularly assigned duties in more than one state. Although a localization test may be met, do not withhold Illinois Income Tax unless the employee is an Illinois resident, or, if the employee is not an Illinois resident, the employee earns more than 50 percent of the compensation in Illinois (Illinois flight miles versus all flight miles). Illinois flight miles do not include miles flown over Illinois without taking off or landing. 
  3. The employee works on a vessel and performs regularly assigned duties in more than one state. Although a localization test may be met, do not withhold Illinois Income Tax unless the employee is an Illinois resident.

Examples of compensation paid in Illinois:  

  1. Your company, headquartered in Georgia, employs an Indiana resident to make sales for your company. You control your employee’s services, all of which are performed in Illinois, from your Georgia office. Compensation is paid in Illinois because all of your employee’s services are performed in Illinois.
  2. Your company, headquartered in Maryland, employs a Missouri resident to make routine service calls in Illinois and Missouri. The office from which the employee works and receives instruction (i.e., the base of operations) is in Illinois. Compensation is paid in Illinois because the base of operations is in Illinois and some of the services (non-incidental) are performed in Illinois.
  3. Your company, headquartered in Ohio, employs an Illinois resident. There is no base of operations. The employee is controlled from your Ohio headquarters. Because services are performed in Illinois, Iowa, and Indiana, the services are not localized in only one state. Compensation is paid in Illinois because your employee is an Illinois resident, some of the service is performed in Illinois, and no service is performed in Ohio.
  4. Your airline company employs a Missouri resident to fly to various destinations in the United States. Your employee reports to and flies out of a terminal in Illinois. According to your records, 58 percent of your employee’s compensation (flight time in Illinois versus flight time to other destinations) is earned in Illinois. Therefore, you withhold Illinois Income Tax because more than 50 percent of your employee’s compensation was earned in Illinois. Illinois flight miles do not include miles flown over Illinois without taking off or landing.

See Illinois Administrative Code, Title 86, Section 100.7010 or Publication 130, Who is Required to Withhold Illinois Income Tax, for more information.

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