HAR § 18-241-4-05 — Payroll factor

(a) The payroll factor is a fraction, the numerator of which is the total amount paid in this State during the taxable year by the taxpayer for compensation and the denominator of which is the total compensation paid both within and without this State during the taxable year. The payroll factor shall include only that compensation which is included in the computation of the apportionable income tax base for the taxable year. (b) The compensation of any employee for services or activities which are connected with the production of nonbusiness income (income which is not includable in the apportionable income base) and payments made to any independent contractor or any other person not properly classifiable as an employee shall be excluded from both the numerator and denominator of the payroll factor. (c) Compensation is paid in this State if any one of the following tests, applied consecutively, is met: (1) The employee’s services are performed entirely within this State. (2) The employee’s services are performed both within and without this State, but the service performed without the State is incidental to the employee’s service within the State. HRS §241-4