Key Takeaways
- The varying state rules regarding income tax withholding for non-resident employees are complicated, vary state by state, and have been the subject of much consternation since the pandemic drove many employees to work remotely.
- Alabama’s pronouncement should be considered in light of a 2023 Alabama decision by the Tax Tribunal with a significant impact for non-resident employees working for Alabama employers remotely.
- Federal legislation that would limit states’ ability to tax remote employees is pending in Congress.
Background
The taxation of non-resident workers – those working in a state in which they do not live - has always posed a vexing problem for both employers and employees. It requires consideration of multiple factors for employers to apply wage withholding. A significant one is whether the employee’s state where he or she works and the state where he or she lives have reciprocity agreements whereby neither will tax such non-resident employees. If not, the state of employment might either tax the non-resident employee on the first day and the first dollar that the employee made, or it might have a days worked or dollars earned threshold. Additionally, certain states apply the so-called “convenience of the employer” rule, whereby employees working at home by their own design are nonetheless considered subject to income tax in the state where they normally work out of an office.
The pandemic exacerbated these issues, as employees began to work from home; companies found their employees who historically worked in their offices had scattered around the country, if not the globe. Post-pandemic, as remote employment gained traction, income tax withholding for these employees remains a challenge for employers and workers.
Alabama and the Bollinger Case
The Alabama Tax Tribunal addressed the income tax issues around remote employees in its decision in Bollinger v. Ala. Dep’t of Revenue, Docket No. INC. 22-390-LP (Ala. Tax Trib. Mar. 8, 2023). In Bollinger, the taxpayer worked for a large bank located in Homewood, providing customer service on repossessions. During the pandemic, his job function was converted to remote status, and he initially completed this work via the telephone from his Alabama residence. During 2020, Bollinger’s employer permitted him to permanently work remotely from Idaho. According to the taxpayer, he changed all indicia of domicile, moved out of his apartment, did not otherwise own any Alabama property, and voted in Idaho in the 2020 election. The state argued that he did not effectively terminate his domicile, and even if he did, the wages were properly sourced to Alabama because they arose from his employment by an Alabama business.
The Tax Tribunal agreed that the taxpayer had effectively severed his domicile in Alabama. However, it concluded that in the context of remote work, his wages remained Alabama sourced income. The Tribunal relied in part on Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) for the proposition that business can be conducted across state lines remotely, and it does not offend the Constitution to subject the taxpayer’s wages to tax in this case.
Forvis Mazars Insight: While the opinion does not use the exact words and may differ a bit conceptually, in practice, the decision comes close to applying the “convenience of the employer” doctrine to employees working remotely for Alabama employers.
The Alabama Notice
The Notice, entitled “Alabama Income Tax Withholding Guidance for Non-resident Employees” and dated August 25, 2026, explicitly states that Alabama income tax is to be withheld on non-resident employees’ wages only to the extent they are physically performing services for their employer in Alabama. Per the language of the notice, “If a non-resident employee performs no services in Alabama during the year, Alabama income tax withholding is not required solely because the employer is located in Alabama.” The notice also references Alabama’s newly enacted safe harbor in Code of Alabama §40-18-2.2(b), effective January 1, 2026, exempting non-resident employees from tax if they work thirty or fewer days in the state. Finally, it notes that the Alabama Department of Revenue will not follow Bollinger to the extent it conflicts with the notice.
Proposed Federal Legislation
Three members of the House of Representatives have introduced the Multi-State Worker Tax Fairness Act of 2026 (Federal H.R. 10142). The proposed legislation, which would be codified at 4 U.S.C. § 127, would repudiate holdings like Bollinger and the various states that apply a “convenience of the employer” test by permitting states to tax the income of non-residents only on wages that were earned while they were physically present in the state. It is worth noting that the three sponsors of the legislation are members from New Hampshire, New Jersey and Connecticut, states whose neighbors have (or did) use a “convenience of the employer” test to tax those of their constituents who worked from home in those states for an employer based in a neighboring state.
Forvis Mazars Insight: Similar legislation has been proposed in past congressional sessions and rarely, if ever, advanced out of committee. The current legislation was introduced on August 24th and has not been referred to a committee yet. Given that this Congress is close to its conclusion, it is unlikely to pass.
How Forvis Mazars Can Help
Employers face continuing difficulty in applying the withholding rules to non-resident and mobile employees. We can help you understand the rules and assist with your compliance obligations.