Changes Needed to Non-Resident Income Tax Policy

When most South Carolinians think about state income taxes, they imagine filing a single return. Yet, for the estimated 200,000 residents who cross a state line to earn their paycheck, and the 121,000 non-residents who work in-person in South Carolina, the reality of tax season is a little more complicated. These citizens are often caught in a web of double taxation and administrative headaches that limit economic opportunity and mobility.

The rise of remote work further adds to the number of individuals impacted by non-resident income tax. Before the pandemic, about 5.8 million Americans worked outside their state of residence; by 2021 that number had fallen to 4.5 million, while those working almost exclusively from home soared to 27.6 million. Remote arrangements are beneficial for lowering both housing and transportation costs, but experts warn that conflicting state tax rules impose “higher costs for workers and employers” when a laptop crosses state lines. That is why six out of eight policy experts interviewed by the United States Government Accountability Office in 2025 urged states to adopt clearer nexus standards or safe-harbor thresholds to remove this barrier to telework.

The Current Situation

South Carolina currently taxes all income earned inside its borders, whether the earner is a resident or not. Non-residents must file Form SC 1040 with Schedule NR once South Carolina-source wages exceed $2,000, while employers must begin withholding on the first day of work. Because of this policy, even individuals who only work in the state occasionally may still face annoying filing and withholding requirements.

Additionally, South Carolina employs a “source principle” to tax income where it is earned, while most domiciliary states concurrently apply a “residence principle,” taxing their residents on all income, regardless of origin. This means that, in some cases, two states can tax the same income. This dual claim often results in double taxation, especially when credits for taxes paid to other states are insufficient or overly complex.

Moreover, The Department of Revenue collects roughly $6 billion a year in individual income tax, but a large share of returns, especially those filed by short-term non-residents, generate little or no net revenue after credits. While current state policy casts a wide net, much of what it pulls in from non-resident filers contributes little to actual tax revenue. This has tax experts questioning whether the administrative effort is worth the fiscal return.

The Case for Reform: Costs and Inefficiencies

The consequences of this policy extend beyond the tax return. For residents of border communities like Fort Mill or North Augusta, working across state lines often entails higher effective tax rates, multiple state filings, and hundreds of dollars in additional tax preparation fees. These burdens discourage both mobility and economic integration. A marketing consultant living in Augusta who spends just a few days a month with clients in Aiken, or a traveling musician performing one-night shows in Greenville, can find themselves ensnared in South Carolina’s tax net.

Compounding the issue, the state’s tax regime disproportionately affects small businesses, gig workers, and short-term contractors. These groups often lack the administrative capacity to navigate the state’s complex non-resident filing rules. South Carolina’s 2 percent withholding rule on non-resident contractor payments exceeding $10,000 imposes added complications, especially for those engaged in brief or sporadic in-state engagements.

Notably, enforcement remains limited and inconsistent. Most individuals are unaware of their tax obligations, and even well-intentioned taxpayers may inadvertently violate the law due to the difficulty of determining when filing or withholding requirements apply. State revenue departments do not track workers’ emails or conference attendance, and employers, especially small ones, are ill-equipped to shoulder compliance duties.

The revenue South Carolina collects from non-resident filers is modest in comparison to the administrative costs involved. Nearly half of income tax filers in South Carolina owe no tax, and many of these are non-residents whose compliance costs exceed the tax owed (see slide 19). Estimates suggest that waiving filings for returns with less than $100 in liability, which is often correlated with short-term, low-income earners, would cost the General Fund less than $10 million, or under 0.2 percent of annual income tax revenue. Simultaneously, it would relieve over a quarter-million filers from unnecessary paperwork and save small employers millions in payroll service costs.

The disconnect between the resources spent processing non-resident filings and the limited revenue they bring in makes a strong case for change. The good news is that South Carolina doesn’t have to start from scratch. Other states have already begun rethinking how they handle non-resident income taxes, and their experiences offer a path forward.

Indiana

In 2023, Indiana enacted Senate Enrolled Act 419, granting a 30-day filing and withholding exemption to most non-resident employees. The National Union Foundation’s 2024 ROAM index, which analyzes each state’s tax and regulatory policies to see how they treat remote workers, credited this change along with existing reciprocity agreements for positioning Indiana as the best state for remote work out of all states with an income tax. While the state was implementing income tax reforms, Indianapolis saw a 295 percent jump in remote workers between 2014 and 2023, suggesting that tax simplicity is part of a broader business-climate advantage. By reducing red tape for out-of-state workers and their employers, Indiana has positioned itself as a more attractive destination for both remote talent and businesses looking for flexibility, boosting overall economic activity.

Montana

Montana offers another example of how states are modernizing their approach to non-resident taxation in practical, cost-effective ways. House Bill 447 (2023) created a filing and withholding exemption for non-residents who work in the state fewer than 30 days a year. State instructions note that eligible workers “do not have an income-tax filing requirement and their employers do not have a wage-withholding requirement,” freeing payroll departments from tracking sporadic days in Bozeman or Billings. Legislative fiscal staff projected the revenue loss at well under 0.1 percent of the individual-income-tax base, a percentage that is easily offset by administrative savings. Through these reforms, Montana was able to ease the burden on both workers and employers without significantly impacting its state budget.

Reciprocity Agreements

Reciprocity agreements are another way states have simplified non-resident income taxation, and they are particularly effective in regions with high levels of cross-border commuting (see Figure from the Tax Foundation below). Long-standing agreements such as Pennsylvania–New Jersey have demonstrated that shifting tax liability to the worker’s residence state can sustain cross-border labor markets without eroding revenue. This approach is especially beneficial for metro areas where workers routinely live in one state and work in another, as it removes the need for dual filings and reduces confusion around withholding. Research published by the National Bureau of Economic Research notes that the arrangement “shift[s] income taxes away from the location of work to the location of residence,” improving welfare in integrated metro areas. Empirical studies of the Indiana–Kentucky and Illinois–Iowa agreements likewise report lower average compliance costs per worker, typically between $250 and $400 a year, while state revenues remain stable because taxpayers shift, not disappear. In other words, reciprocity does not shrink the tax base, it simply aligns tax obligations with where people actually live, making the system more intuitive and easier to manage.

Reform Pathways for South Carolina

South Carolina has several viable options for modernizing its non-resident income tax system. The aim of these reforms is not only to reduce compliance burdens and administrative waste but also to position the state as a more attractive destination for mobile talent and business investment. While no single policy will resolve all inefficiencies, a combination of targeted adjustments could be what South Carolina needs to meaningfully improve the tax system’s fairness and functionality.

1.      Adopt a 30-Day Safe Harbor

Aligning with Indiana, Montana, West Virginia, and Louisiana would exempt business travelers and short-term contractors who spend fewer than 30 days a year in the state. The Council on State Taxation’s model legislation indicates that most tax revenue is already captured from longer-term presence, making the fiscal impact of an exemption for short-term workers minimal. By carving out these low-volume, low-yield interactions, South Carolina could redirect administrative resources toward higher-value enforcement while offering relief to mobile workers and their employers.

2.      Pursue Reciprocity with Georgia and North Carolina

The Charlotte and Augusta corridors are hotspots for commuter traffic to and from South Carolina. Creating a reciprocity agreement with either or both states is a natural way to improve workforce mobility and economic integration across these metropolitan areas while eliminating double taxation. The Tax Foundation estimates that similar agreements reduce aggregate preparation and withholding costs by roughly 25 percent for affected taxpayers, freeing resources for productive activity instead of paperwork.

3.      Raise and Index the Contractor-Withholding Threshold

Raising the current 2 percent withholding threshold on payments to non-resident contactors from $10,000 to $25,000 annually and indexing to inflation would focus enforcement efforts on projects with more substantial revenue implications. This change would relieve smaller vendors and one-time performers from burdensome filing and withholding requirements while preserving oversight of larger contracts where meaningful sums are at stake.

4.      Modernize Digital Filing

Creating a centralized, mobile-friendly portal that is modeled on South Carolina’s existing sales-tax platform would streamline reporting for both workers and employers. This echoes the U.S. Government Accountability Office’s recommendation that states simplify tax rules for telework, especially as more people work across jurisdictions without physically relocating. By reducing friction in the filing process, the state could increase voluntary compliance while lowering processing costs.

5.      Commission an Empirical Fiscal Note

A thorough study of revenue generated from non-residents earning less than $50,000 in South Carolina-source income would allow lawmakers to assess whether current thresholds are appropriately calibrated. Data-driven policy decisions would ensure that any exemptions or adjustments are fiscally responsible and tailored to actual revenue patterns, not assumptions.

With workforce mobility and remote work continuing to rise, modernizing the state’s non-resident tax policies is a strategic investment in South Carolina’s long-term economic competitiveness. Across the country, states that have embraced reciprocity agreements or 30-day safe harbors report negligible revenue losses, measurable compliance-cost reductions, and a reputational boost with mobile talent. By following their lead and enacting safe-harbor thresholds, regional agreements, and digital simplification, South Carolina can eliminate double taxation, strengthen its border economies, and signal that the Palmetto State is open for business in a mobile era.