The rise of remote and hybrid workplaces since 2020 has reshaped the employment landscape, with a growing number of organizations hiring employees who live and work across state lines.
While flexible work arrangements are one of the most sought-after benefits by employees—they present a unique challenge for employers navigating the process of properly reporting and paying unemployment insurance (UI) taxes.
If your organization is one of the many that rely on hybrid or remote employees who work across state lines—or if your organization employs workers who perform work in more than one state—it’s particularly important to have a solid understanding of state and federal UI tax obligations for multi-state employers. Here’s what you need to know:
Multi-state unemployment tax compliance
Employers are responsible for paying federal and state unemployment insurance (UI) taxes for each of their employees. These taxes are used to fund unemployment benefits for employees who have been laid off, furloughed, or who have otherwise lost work due to no fault of their own.
When an employee lives and works in the same state that their employer operates out of, withholding UI taxes is relatively straightforward. But when employees live in one state but work in another—or perform work in multiple states—things can become more complicated.
Employers who may find themselves in this situation include:
- Have remote or hybrid employees.
- Are located near state borders.
- Have employees travel to job sites in other states.
Federal Unemployment Insurance for Out-of-State Employees
FUTA is the Federal Unemployment Tax, a law that taxes employers on their employee’s wages and allocates those taxes to state UI agencies to fund benefits for eligible workers. An employer’s FUTA tax obligations are the same regardless of what states they employ workers in, or where their employees conduct work.
In 2024, employers are responsible for paying a FUTA tax of 6% of the first $7,000 in wages paid to an employee. (While most employers are responsible for paying FUTA tax, there are some exceptions. Businesses that are new and haven’t paid wages of $1,500 or more in any calendar quarter during the current or previous year, or haven’t had employees for at least some part of a day in 20 or more different weeks in those years, are generally exempt from FUTA. Additionally, certain types of organizations like religious groups, nonprofit organizations, and government entities may also be exempt depending on specific criteria. It’s important for employers to understand their specific situation and consult with a tax professional or the IRS for guidance on their FUTA obligations.)
State Unemployment Insurance for Out-Of-State Employees
SUTA (or SUI) refers to state laws requiring employers to remit payroll taxes to state UI agencies to fund UI benefits for workers. SUTA tax rates and taxable wage limits differ from state to state, so the amount of SUTA taxes that an employer is liable for will vary based on which state they are obligated to pay them to.
Multistate employers are obligated to register with the state workforce agency in each state where they have employees and pay SUTA payments to state agencies based on the actual work locations of employees, rather than where the employer is located.
The Department of Labor’s “Localization of Work provisions” tests can help multi-state employers ensure that they are remitting SUTA taxes to the right state for each of their employees.
The DOL’s tests include four parts:
- Localization of services
- Base of operations
- Direction and control
- Residence
Employers should start with the first test and only move on to the next item if needed, according to the DOL.
Localization of Service
The first question employers must ask is whether the employee’s service is localized in the state. Generally, an employee’s physical presence is the determinative factor in determining “localization.” An employee’s work is localized if they physically work entirely from that state, or if they primarily work in that state and temporarily, in isolated events, work in other states.
The DOL provides the following example: A resident of New York was hired as a consultant for a consulting agency. All services were performed in New York for two years, after which the employee moved to Florida because her husband had changed jobs. The employer agreed to allow the employee to telecommute from Florida. Since this employee is now performing all duties in Florida, even though the employer is located in New York, their services are localized in Florida and subject to Florida law. Therefore, all wages from the date they began telecommuting from Florida are reportable to Florida.
Base of Operations
If your employee’s service is not localized in one state, you must ask whether they perform some work in the state where their base of operations is located. “Base of operations” means the place where an employee begins work (or where they receive employee instructions or communications, replenish inventory, repair equipment, or perform any tasks relevant to their job.) The base of operations should not be confused with the place from which their work is directed or controlled.
DOL example: An employee worked for a company whose home office was in Pennsylvania. He was made a regional director working out of a branch office in New York. He worked mostly in New York, but spent considerable time also in Pennsylvania and New Jersey. The individual’s base of operations was in New York. Since he performed some service in New York and his base of operations was in New York, all of the individual’s service is covered by the New York law.
Direction and Control
If there isn’t a base of operations, an employer must ask if their employee performs any work in the state where the service is directed and controlled—aka, the place where their employer or manager supervises their work.
DOL example: A salesman residing in Cleveland, Ohio, works for an organization whose factory and sales office are in Chicago, Illinois. The salesman’s territory is Kentucky, Arkansas, Oklahoma, Illinois, and Missouri. He does not use either the Chicago office or his home in Ohio as his base of operations. Since his work is not localized in any state and he has no base of operations, all of his service is covered by Illinois law because his work is directed and controlled from his employer’s Chicago office and some of his service is in Illinois.
Place of Residence
If none of the above tests fit an employee’s situation, the employer must ask whether their employee can conduct some work in the state where they live.
DOL example: A consultant employed by an Indiana company lives in Illinois, but his work covers clients in Iowa, Kentucky, and Illinois. The consultant’s service is not localized in any state. He uses his employer’s Indiana office as his base of operations, and his service is directed from that office. He performs no service in the state in which his base of operations is located, nor in the state from which his service is directed and controlled. He does some work in Illinois, the state in which he lives. Consequently, all of his services are subject to Illinois law.
In rare instances, an employee’s work situation may not meet any of the above tests. In that case. An employer may be able to elect to cover the employee’s services in one state under an “election of coverage” provision or “Interstate Reciprocal Coverage Arrangement.”
Under the reciprocal coverage arrangement, an employee’s work may be covered in any one of the following states: (1) a state in which some part of the individual’s service is performed, (2) the state in which he lives, or (3) a state in which the employer maintains a place of business.
If an employee lives in one state and works in another, where do they file for unemployment?
Employers play a crucial role in helping laid-off employees access unemployment benefits and providing them with the necessary guidance to do so. If an employee lives in one state and works in another, or splits their work between different states, they are likely to have questions regarding where they should file their UI claim.
According to the Department of Labor’s guidance, the rule of thumb is simple: employees should file the claim with the state where their wages were reported. If an employee works in multiple states, the state unemployment insurance agency in the jurisdiction where they live can provide information about filing their claim with other states.
Importantly, employees can file for UI in any state. The caveat is that, regardless of which state the claim is filed in, it will be governed by the unemployment regulations of the state in which they worked (the state in which their wages were reported). If an employee files for unemployment in a state that is different from the state where they worked for you, you might receive an out-of-state or “interstate claim.”
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
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