Nebraska’s tax code should encourage remote workers to move in
Nebraska has one of the most aggressive regimes for taxation of non-resident income in the country, according to new rankings from the National Taxpayers Union. While raising tax revenues from non-Nebraskans might seem like found money, it also ensures that many non-Nebraskans will never visit Nebraska for work purposes.
Tax compliance is heavy for remote workers who visit the state and for businesses that employ them. As a result, over-aggressive taxation of non-resident income deters businesses from bringing workers into Nebraska for short periods of time, and discourages mobile workers from working in the Cornhusker State.
First, there is no tax filing threshold for non-residents who spend time in Nebraska. That means that if a non-resident works for a single day in Nebraska, he or she incurs a Nebraska tax liability and so must file a Nebraska income tax return. A business that employs a worker who stays a few days in Nebraska incurs a tax withholding liability, meaning the business must withhold taxes for income earned while in Nebraska.
This might seem like a reasonable approach. If you’re in Nebraska, you should pay Nebraska taxes, right? However, the burden for filing and withholding taxes in Nebraska will often cost more in compliance and filing than in actual taxes owed. The businesses and workers might even ignore the tax liability. That is why states often create thresholds that allow people to stay in their state for a certain number of days without incurring a tax liability.
LB 173, proposed by Senator Eliot Bostar, would fix this problem for both businesses and individual workers. First, the bill would establish a filing threshold of 30 days for nonresident individuals who perform employment duties in Nebraska so long as they perform employment duties in more than one state in the year. That means taxpayers will not be liable for paying taxes if the taxpayer spends less than 30 days in Nebraska.
Similarly, the bill creates a withholding threshold for employers. Businesses would not be required to withhold Nebraska income taxes until an employee exceeds the filing threshold of 30 days. Under the bill, once the worker exceeds the 30-day threshold, taxes will be owed and must be withheld for the entirety of the taxpayer’s stay in Nebraska. LB 173 would also ensure that days are not counted towards Nebraska tax liability if the majority of the day is spent in another state.
It makes sense to provide a meaningful 30-day filing and withholding threshold, and it also makes sense to apply taxation to the entire portion of a taxpayer’s income that was earned while in Nebraska after the 30-day threshold is exceeded.
Professional athletes, performers, and public figures would still owe taxes for income derived while in Nebraska under LB 173. States commonly apply different rules to such high-paid workers who incur a large dollar tax liability from a short stint in Nebraska. However, LB 173 helpfully clarifies that “public figures” do not include member of a business’s board of directors or other governing body. This is a wise carve-out so as to avoid pushing business headquarters and corporate meetings out of Nebraska.
In addition, Nebraska has a unique rule that imposes a tax liability on non-Nebraskans who live across the border and work for a Nebraska business. The so-called “convenience of the employer” rule means that if a worker previously commuted into Nebraska for work, and then stopped commuting into Nebraska and stayed in Iowa, that worker still owes taxes to Nebraska. The state treats the worker as if he or she still works in Nebraska even though he or she stays in Iowa out of convenience. The result is that the worker is subject to double taxation by both Nebraska and Iowa.
Nebraska is one of only four states to impose such a rule, along with New York, Delaware, and Pennsylvania. LB 416, sponsored by Senator Kathleen Kauth, would remove Nebraska’s “convenience of the employer” rule so that former commuters who no longer step foot into Nebraska are no longer treated as Nebraska workers.
Nebraska is less attractive for businesses and remote workers with the aggressive rules that are currently on the books. It is especially important to have friendly tax rules for non-resident income given the significant increase in remote work along with a gradual return to pre-pandemic patterns of domestic business travel. Nebraska can make itself more attractive for businesses and workers by rolling out the red carpet to get them to move in rather than punitively taxing them as soon as they step foot in the state.