My Illinois-resident employee splits work time between an out-of-state office and an Illinois office each pay period -- can I use my own proration method (or must I use a time and attendance system or Form IL-W-6) to figure out how much of the wages are taxable to Illinois?

Plain-English summary

An employer asked the Department to approve a specific method it uses to figure out how much of an Illinois-resident employee's wages are taxable to Illinois. The employee works for the same company at both an out-of-state office (the employee's "base of operations") and an Illinois office, with the split of hours between the two varying from one bi-weekly pay period to the next. Because deduction rules differ between the two states, the employer prorates the employee's total wages (after certain deductions) using a ratio based on gross wages earned in each state, and reports that prorated amount as Illinois adjusted gross income for resident tax purposes.

The Department did not approve or disapprove the specific proration method. GILs are not the vehicle for blessing a taxpayer's particular calculation methodology -- the Department instead restated the statutory rule that governs when compensation counts as "paid in Illinois" in the first place.

The governing rule: Section 304(a)(2)(B)(iii). For tax years ending on or after December 31, 2020, compensation is paid in Illinois if (1) some of the employee's service is performed in Illinois, (2) that Illinois service is "nonincidental" to the service performed outside Illinois, and (3) the employee performs services in Illinois for more than 30 working days during the tax year. When those conditions are met, the amount of compensation paid in Illinois is the employee's total compensation multiplied by the ratio of working days spent in Illinois to total working days spent both within and without Illinois.

The time-and-attendance-system-or-Form-IL-W-6 rule. Separately, the Department explained the mechanism employers are expected to use for tracking and allocating wages by work location. If an employer maintains a time and attendance system that (a) requires the employee to record the work location for every day worked outside the state where the employee's duties are primarily performed, and (b) allows the employer to allocate wages among all the states where the employee performs services, the employer can use that system. If the employer does NOT maintain such a system, it must complete Form IL-W-6 instead.

What the Department didn't do. It never evaluated the taxpayer's own proration formula (based on the ratio of gross wages earned in each state, applied to total wages after pre-tax deductions) against the working-days-based formula in Section 304(a)(2)(B)(iii), and never stated whether that gross-wage-ratio method satisfies the "time and attendance system" requirement or whether the employer should instead be using Form IL-W-6. The letter leaves that comparison to the taxpayer.

What this means for you

Employers with employees splitting time between Illinois and another state

The statutory default for sourcing compensation is based on working days in Illinois versus total working days -- not a ratio of gross wages earned in each state. If your proration method uses wages (rather than days) as the allocation basis, confirm with a tax professional whether it satisfies the "time and attendance system" requirements or whether you should be completing Form IL-W-6 instead.

Payroll and HR professionals

To rely on a time and attendance system rather than Form IL-W-6, the system must require the employee to record their work location for every day worked outside the state where their duties are primarily performed, and must let you allocate wages among all states where the employee actually works. A system that only tracks total hours or percentages by pay period, without a day-by-day location record, may not meet this standard.

Accountants and tax professionals

Because the Department treats the 30-working-day and nonincidental-service tests in Section 304(a)(2)(B)(iii) as the operative rule, build your client's wage-sourcing methodology around actual working days in each state, and be ready to justify any wage-ratio-based shortcut against that day-count standard if questioned.

Common questions

Q: Did the Department approve the employer's specific wage-proration method in this letter?
A: No. The Department did not evaluate or approve the specific gross-wage-ratio proration method described in the request; it instead restated the general statutory sourcing rule and the time-and-attendance/Form IL-W-6 mechanism.

Q: When is compensation considered "paid in Illinois" for a multistate employee?
A: When some of the employee's service is performed in Illinois, that Illinois service is nonincidental to service performed elsewhere, and the employee works in Illinois for more than 30 working days in the tax year. The taxable amount is the employee's total compensation multiplied by the ratio of Illinois working days to total working days.

Q: What must an employer's time and attendance system do to be usable for wage allocation?
A: It must require the employee to record their work location for every day worked outside the state where their duties are primarily performed, and it must allow the employer to allocate the employee's wages among all the states where the employee performs services.

Q: What if an employer doesn't have a qualifying time and attendance system?
A: The employer must complete Form IL-W-6 instead.

Citations and references

Statutes cited:

• 35 ILCS 5/201(a) (imposes Illinois income tax on net income for the privilege of earning or receiving income in or as a resident of Illinois)
• 35 ILCS 5/304(a)(2)(B)(iii) (compensation paid in Illinois test: nonincidental in-state service exceeding 30 working days; apportionment by working-day ratio)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/it23-0008-gil.pdf

Original ruling text

IT-23-0008-GIL 06/05/2023 COMPENSATION PAID IN ILLINOIS
Employer may use time and attendance system to allocate wages between
states where employee performs services or complete Form IL-W-6.. (This is a
GIL).
June 5, 2023
NAME/ADDRESS
Dear NAME:
This letter is in response to your letter dated January 25, 2021, in which you
requested information about sourcing wages when an individual performs services in
two states. The Department issues two types of letter rulings. Private Letter Rulings
(“PLRs”) are issued by the Department in response to specific taxpayer inquiries
concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding on the Department, but only as to the taxpayer who is the subject of the request
for ruling and only to the extent the facts recited in the PLR are correct and complete.
Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
BUSINESS. requests a ruling on the proper treatment of wages
earned by an Illinois resident working in Illinois and outside of the state
under Section 304(a)(2)(B) of the Illinois Income Tax Act (35 ILCs 5/304).
Taxpayer Information
BUSINESS.
Illinois Employer ID ##-####### ### S
Description of Taxpayer's Business Operations
BUSINESS. is a trusted global provider of indirect tax software and
solutions. The company provides cloud­ based and on-premise solutions
that serve specific industries for every major line of indirect tax, including
sales and consumer use, value added and payroll.
Facts Relating to Transaction
Here are the facts of the case:
•
•

Tax year YEAR
The taxpayer's employee is a domiciliary resident of Illinois who

BUSINESS/ NAME
Page 2
June 5, 2023
performs services for both an office in STATE and an office in Illinois. In
most cases, the employee's percentage of time worked in the two states
varies for each bi-weekly pay period. There may be times where the
employee works more hours in STATE and other times in Illinois.
• The employee's base of operations is in STATE.
• The taxpayer uses a proration method explained below to allocate
the wages for Illinois. This is necessary to account for differences in
taxability rules of deductions between different states.
Proration Method Steps:
1) Calculate the proration factors for Illinois and STATE using the gross
regular and supplemental wages earned in each state.
• $$$$$ earned in Illinois divided by $$$$$$ total wages= .%%%
• $$$$$$ earned in STATE divided by $$$$$ total wages = .%%%
2) Multiply the total gross less deductions by the proration factor of the
wages earned in Illinois. This is reported as the adjusted gross for Illinois
and the resident tax is calculated on this amount.
• $$$$ X .%%% = $$$$
1
Total Wages
IL Resident

2

3

IL work

ST work

A

Regular Gross

$ 13,789.45

$ 10,234.55

$ 3,554.90

B

Supplemental Gross

$

$

$

C

Total wages (Reg+ Sup)
Before deductions

$ 14,493.62

$ 10,234.55

$ 4,259.07

D

Pre-tax deductions

$ 1,640.11

$ 1,217.29

$

E

Adjusted wages
After deductions

$ 12,853.51

704.17

0

704.17

A+B

422.82
C-D

C2 / Cl
and
F

10,234.55 / 14,493.62

proration factors based on total wages
Prorated IL resident gross

$ 9,076.40

0.706141737

4,259.07 / 14,493.62 C3/Cl
0.293858263

El x F2

The taxpayer is prorating the total resident wages to exclude wages
that are taxable for STATE. Only part of the wages is taxable for IL
because the wages earned in STATE were not incidental pursuant to
Section 304(a)(2)(B) of the Illinois Income Tax Act (35 ILCs 5/304). The

BUSINESS/ NAME
Page 2
June 5, 2023
taxpayer has determined that no statement of authorities exist that
contradicts the taxpayer's views on this matter.
RULING REQUESTED
The taxpayer requests the approval of the proration method used. The
taxpayer uses this proration method to account for differences in taxability
of deductions and compensations between states.
DEPARTMENT’S RESPONSE:
Section 201(a) of the Illinois Income Tax Act (IITA) imposes a tax measured by
net income on individuals, corporations, trusts and estates for the privilege of earning or
receiving income in or as a resident of this State. IITA Section 304(a)(2)(B)(iii) provides:
For tax years ending on or after December 31, 2020, compensation is paid
in this State if some of the individual's service is performed within this
State, the individual's service performed within this State is nonincidental
to the individual's service performed without this State, and the individual's
service is performed within this State for more than 30 working days
during the tax year. The amount of compensation paid in this State shall
include the portion of the individual's total compensation for services
performed on behalf of his or her employer during the tax year which the
number of working days spent within this State during the tax year bears
to the total number of working days spent both within and without this
State during the tax year.
If an employer does not maintain a time and attendance system where (a) the
employee is required to record the work location for every day worked outside of the
state where the employment duties are primarily performed; and (b) it allows the
employer to allocate the employee’s wages for income tax purposes among all states in
which the employee performs services, then the employer shall complete Form IL-W-6.
I hope this information is helpful. If you require additional information, please visit our
website at www.tax.illinois.gov or contact the Department’s Taxpayer Information
Division at (217) 782-3336.
Very truly yours,
Brian Fliflet
Deputy General Counsel