State Unemployment Taxes for Multi-State Employees

State Unemployment Tax DecisionsWhile many employers have a good understanding about state withholding taxes and reciprocity between the states, there are usually a lot of questions about where to pay the unemployment taxes.

When employees only perform services in one state, the employer pays unemployment taxes to that state.  But it gets more complex when an employee works in more than one state.  Paying the incorrect state unemployment agencies could mean paying double taxes in some states and/or penalties and interest in another state.

Employers can use the following factors to determine the state to which an employee should be “allocated” for unemployment insurance purposes.  Once a worker satisfies any part of the criteria, no subsequent parts should be applied and the unemployment should be paid to that state.

  1. Are services “localized?”  An employee’s services are localized within a state if services performed outside the state are merely incidental to services performed inside the state.  If an employee’s services are localized, the employer is subject to the unemployment insurance law of that state for the employee and the other allocation factors need not be considered.
  1. Does the employee have a “base of operations?”  When an employee regularly works in more than one state (no localization), the employer should determine if the employee has a base of operations in one of those states.  If the employee has a single base of operations in a state where he or she works, that state’s unemployment insurance law governs.
  1. Is there a “place of direction or control?”  If the employee’s work is not localized and there is no base of operations, the next factor to consider is whether there is a place of direction or control in one of the states where the employee performs services.
  1. Where is the employee’s “state of residence?”  In those relatively rare instances where none of the three previous factors can be applied, the state where the employee resides has jurisdiction if the employee performs some work in that state.
  1. Interstate reciprocal coverage?  When no tests apply?  Nearly all states participate in reciprocal coverage arrangements allowing employers to choose the state of coverage for certain multi-state workers who regularly move from state to state.  Under this arrangement, the employer can choose to cover the entire service of the employee in:
  • Any state in which the employee works;
  • Any state in which the employer maintains a place of business; or
  • The employee’s state of residence

Unemployment is typically determined quarterly and most state unemployment agencies have a catch-all statement that, “if the wages paid to the employee are covered under the unemployment insurance law of another state then you should NOT count them towards their state.”  As always, be sure to check with each state’s unemployment law.

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

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