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One of the most common questions our payroll service bureau gets asked is which state should I pay unemployment tax to for my multi-state employees? Whether it's remote work arrangements, sales positions that require travel, or companies with offices in multiple states, navigating the complexities of employment across state borders can present unique challenges. One such challenge is understanding the rules and regulations surrounding unemployment taxes for employees who work in multiple states. In this article, we will run through the key tests employers of multi-state employees need to be aware of regarding unemployment taxes.
Unemployment taxes are levied by both federal and state governments to fund unemployment insurance programs, which provide financial assistance to workers who have lost their jobs. Each state has its own unemployment insurance program, with its own tax rates, wage bases, and rules governing eligibility and benefits.
Determining the correct state to report unemployment taxes to for multi-state employees involves considering several factors and applying various tests to ensure compliance with state-specific regulations. Below are the 4 key tests that must be evaluated in chronological order to help determine the appropriate state for reporting unemployment taxes:
The first test is to determine where the employee is performing their job. Their work is considered localized in a state if it is performed entirely within the state. It can also be considered localized to a state if some of the work is performed outside the state and the amount is incidental to the employee’s work performed within the state.
Service is considered incidental if it is temporary or transitory in nature or consists of isolated transactions
If the employee’s service is not localized in any state move to test #2.
The second test is to determine if the employee performs work in the state in which the company base of operations is located. The base of operations is a place of permanent nature from which the employee starts work and customarily returns to in order to receive instructions from the employer, or communications from customers or other persons, or to replenish stocks and materials, to repair equipment, or to perform any other functions necessary to complete the employees job. The base of operations may be the employee's business office which may be located at the employee’s residence, or the contract of employment may specify a particular place at which the employee is to receive directions and instructions. This test is applicable principally to employees, such as salesmen, who customarily travel in several states.
If the employee does not perform any service in the state in which the base of operations is located, move to test #3.
This test examines the place from which an employee’s work is directed or controlled. This is a place where basic authority exists and from which general control and instruction come from. If the employee does not have localized work or a base of operations but the employer directs and controls the employee's work primarily from a specific state, that state will be the appropriate jurisdiction for reporting unemployment taxes.
If the employee does not receive direction or control from a specific state, move to test #4.
If coverage cannot be determined by any of the first three tests listed above, it is necessary to apply the test of residence. Residence is a factor in determining coverage only when the employee’s service is not localized in any state, the employee performs no service in the state in which the employee has a base of operations and is not directed and controlled from a specific state.
For employers with multi-state employees, navigating unemployment tax rules requires a thorough understanding of the laws in each state where they work. By considering factors such as primary work location, temporary assignments, and state-specific rules, employees can ensure compliance with unemployment tax obligations and avoid potential penalties. Employers play a crucial role in facilitating compliance by accurately withholding and reporting wages, as well as staying informed about changes in state laws and regulations. Ultimately, clear communication and cooperation between employers and employees are essential for navigating the complexities of unemployment taxes in a multi-state work environment.
By applying these tests and considering the specific circumstances of each employee's work arrangement, employers can determine the correct state(s) for reporting unemployment taxes and ensure compliance with state regulations. It's important to consult with tax professionals or legal experts specializing in multi-state employment to navigate any complexities and ensure accurate reporting.
Do you have additional questions regarding unemployment or which state applies for your employees? iComp Payroll & HR has over 25 years of experience in payroll, human resources, and timekeeping services for small and medium sized businesses in Minnesota and across the Midwest.
Don’t hesitate to reach out for a free demo of our accurate, affordable, and reliable payroll and timekeeping services by calling 651.259.4260 or completing our online form here.
[Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice. Employers should consult with legal counsel or HR professionals for guidance on complying with all applicable rules and regulations.]
Need help with handling your SUTA tax liability or have additional questions regarding multi-state employees? Give iComp Payroll a call today at 651.259.4260 or ask us for a free consultation or demo through our contact form.
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