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Unemployment Tax Considerations for Out-of-State Employees

By March 1, 2023April 20th, 2023No Comments

Special Note: As employers add remote staff in other states, organizations are reminded to review the unemployment eligibility for those employees. 501(c) Agencies Trust members should contact us immediately to discuss how those out-of-state employees will be managed. 

Are workers going back to the office?

In 2019, as we unknowingly drifted towards a global stay-at-home order, roughly 22% of Americans worked remotely. In 2020, that number jumped to 41% when employers were often forced to send staff home. With much of the pandemic behind us, employers have been steadily calling employees back to the office for at least a few days a week. Today the percentage of fully remote employees stands at 26%, while 66% of employees work away from the office a few days a week. These numbers are expected to grow as attracting new employees continues to be difficult. Remote jobs now make up 15% of all job openings in the United States.

Employers have been on a crash course in learning how to manage out-of-state talent. There are wage and hour, workers’ compensation, health and welfare benefits, and tax implications for staff operating in other states.

Here we are going to focus on the considerations for nonprofits with out-of-state employees.

20-Week Rule

To start, let’s recall how a worker is counted as an employee. Per the Equal Employment Opportunity Commission (EEOC), a worker can be counted as an “employee” if they have worked for at least 20 calendar weeks (regardless of the calendar year). This rule can include some part-time workers as well. This is also the basic rule for all types of employers – including nonprofits.

If you have an employee that now works in another state, per the 20-week EEOC rule, do they qualify for unemployment benefits? Which state do they get benefits from? And what state do you pay unemployment taxes to for this out-of-state employee?

Here are your answers – kinda.

Unemployment Benefits

Is your nonprofit liable for the unemployment benefits of your out-of-state employee?

This answer depends on which state your organization operates. Generally, an employer becomes liable for benefits if it employs four or more workers for some portion of a day in 20 different weeks during the current or preceding calendar year. This is referred to as the “4 and 20 Rule.”

Exceptions to the 4 and 20 Rule

Of course, states are allowed to have greater unemployment benefits than the federal government requires. Some states have determined to offer greater coverage than the 4 and 20 Rule minimum. Below are states with greater coverage:

States that have an exception to the Federal Minimum Requirements

State Exception
Alaska 1 employee or more if at least $250 payroll in the 1 quarter
Arkansas 1 employee or more for 10 days
California 1 employee or more at any time
Connecticut 1 employee or more for 13 weeks
D.C. 1 employee or more at any time
Hawaii 1 employee or more at any time
Idaho 1 employee or more at any time
Iowa 1 employee or more at any time
Maryland 1 employee or more at any time
Massachusetts 1 employee or more for 13 weeks
Michigan 1 employee or more at any time
Minnesota 1 employee or more at any time
Montana $1,000 payroll in a calendar year
New Hampshire 1 employee or more at any time
New Jersey 1 employee or more at any time
New Mexico 1 employee or more at any time
New York 4 in 20 weeks or $1,000 payroll in 1 quarter
Oregon 18 weeks or $1,000 payroll in 1 quarter
Pennsylvania 1 employee or more at any time
Utah 4 employees or more: unless the employer is subject in any other state, they are subject in Utah
Washington 1 employee or more at any time

(Source: Highlights of State Unemployment Compensation Laws – 2022: National Foundation for Unemployment Compensation & Workers’ Compensation.)

Voluntary Election of Benefits

If an employer does not have sufficient out-of-state employees to become liable for unemployment benefits under the 4 and 20 Rule, or if it wishes to provide unemployment insurance for its workers who normally would be exempt under some provision in the law (example: churches), the nonprofit may elect those benefits be made available to the worker – even though they would not normally be liable for the benefits.

Once a decision has been made to voluntarily cover employees for their unemployment benefits it typically has to remain in effect until the employee separates from the organization or a minimum of two years (depending on the state’s rules).

Suppose an employer does not elect to cover the unemployment benefits for out-of-state workers who do not qualify under the 4 and 20 Rule. In that case, that worker is NOT eligible for unemployment benefits following a separation.

Which State Unemployment Tax Act (SUTA) Applies?

When a nonprofit hires an out-of-state employee, they are required to report their wages to the state where they work. That state will then apply any appropriate taxes to the employee and the employer. If applicable, state unemployment taxes (or reimbursable charges) are charged to the employer.

NOTE: Always check with your payroll provider, or applicable state agency, on the proper unemployment taxation of your employees.

Rules for 501(c)(3) Reimbursable Employers

501(c)(3) employers are allowed to opt out of the state unemployment tax system and elect to make payments to reimburse the state in lieu of contributions (taxes) for unemployment insurance benefits paid to their separated employees.

In the case of out-of-state employees, reimbursable employers are held to the same standards as SUTA-paying employers. The state treats them no differently when assessing the benefits coverage of the employee.

501 members and subscribers have unlimited access to HR Services. Contact us anytime regarding this subject or any other HR challenge you may be facing.

Need HR help for a low monthly fee? Contact us today.

The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.

(Image by inkflo from Pixabay)

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