Enhancing Arkansas’s Safe Harbor for Remote Work Employees: A Step Toward Modernization and Reform

Arkansas has improved its state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code in multiple ways over the past decade. The state has made progress by consolidating its once convoluted and overly complex individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. structure. It has also made concurrent improvements to its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate, lowering the top marginal corporate income tax rate alongside the top marginal individual income tax rate. However, these changes only affect Arkansas residents and nonresidents who meet specific guidelines for remitting individual income tax in the Natural State. Despite its strong prior reforms, Arkansas still ranks near the bottom in how it handles non-resident income tax filing and withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. thresholds. Following seismic changes in how employers obtain talent, Arkansas stands out as a state in need of reform to help employers attract the most qualified candidates and relieve the tax filing and withholding requirements for workers who may spend as little as one working day in the Natural State.

To address this issue, Arkansas Representative David Ray (R) has introduced HB 1116, the Remote and Mobile Work Modernization and Competitiveness Act.

The bill proposes three significant adjustments to how Arkansas taxes nonresident workers:

1. Reciprocity Agreements. The bill would allow Arkansas to enter into reciprocity agreements with other states, under which Arkansas and other states mutually agree not to tax each other’s residents for work performed in their states. This would simplify tax compliance and administration by making such workers responsible only for income tax in their state of residence, without obligations for taxes in the nonresident state offset by credits for taxes paid to that state. This measure would add Arkansas to the list of 17 states that already have such agreements.
2. Income Exemption Threshold. The bill would exempt the first $2,500 of nonresident workers’ Arkansas-sourced income from taxation. This is a step in the right direction, avoiding situations where even a single day in the state can trigger tax liability, though it falls below the national median threshold, and a days-based threshold would offer greater simplicity.
3. Withholding Exemption for Short-Term Work The bill combines the income threshold with an employer withholding exemption for remote workers who spend fewer than 15 days working in Arkansas. This benefits both employees and employers. However, most states with residency-based withholding exemptions use a 30-day threshold. Increasing Arkansas’s threshold to 30 days (ideally for both filing and withholding purposes) would align the bill with national norms.

Enhancing these provisions would simplify Arkansas’s state tax code, align it with national trends, and reduce compliance costs for remote employees who may spend only a minimal amount of time working in the state. But even in its current form, the bill represents a marked improvement over existing policy, under which everyone who works for even one day in the state is expected to file and remit taxes—an obligation where compliance costs can far outstrip the actual amount of taxes owed.

Compliance with and enforcement of nonresident employee filing is already low due to the complexity involved. This bill would alleviate some of these compliance challenges while simplifying life for tax-conscious nonresident workers.

The Tax Foundation’s annual State Tax Competitiveness Index highlights the importance of such reforms. Arkansas currently ranks 39^th in the individual income tax component. Enacting these changes would move Arkansas up two places to 37^th.

The Remote and Mobile Work Modernization and Competitiveness Act would be a positive step toward modernizing Arkansas’s tax code. By streamlining, simplifying, and reducing tax burdens for remote and nonresident workers, the bill could make Arkansas a more attractive state for both employees and employers. Adjusting the bill to align with national averages—including raising the income exemption threshold and increasing the withholding exemption period—would further enhance its effectiveness and impact, allowing Arkansas to embrace modernization, attract top talent, and position itself as a more competitive player in the evolving landscape of remote work.

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