Guide to state unemployment taxes for multi-state employees

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Employers often ask: Where do I send state unemployment (SUTA) tax payments when I have employees who live in different states than where they work? There are specific unemployment tax rules for multi-state employees, and while it's always best to seek the advice of your accountant, the below provides an overview of what's expected of employers.

Multi-state unemployment tax compliance 

Of course, all employers need to pay federal and state unemployment taxes for each employee in order to ensure proper access to unemployment benefits in the event of a layoff or termination. But, depending on an employee's individual live and work situation, there can be confusion regarding which state to send that employee's SUTA tax.

Unemployment tax rules for multi-state employees determine which state unemployment tax fund employers pay into for an employee. 

Here are example areas of confusion for many employers:

  1. Employee lives in one state but works in another
  2. Employee works temporarily in one state and regularly in another
  3. Employee splits work time between two or more states 

The state the employer pays SUTA taxes to is the state that funds the employee's unemployment benefits. Employers DO NOT pay SUTA tax to more than one state for a multi-state employee.

Unemployment tax rules for multi-state employees 

Of course, the tax rules governing multi-state employees depend on the specific employee's work situation.

This is where it's necessary to follow the Department of Labor’s Localization of Work Provisions, which will assist in determining which state is responsible for paying out that employee's unemployment benefits (i.e., the state to which the employer pays that employee's SUTA tax).

There are four “tests” employers can use to determine which state an employee is covered by for unemployment purposes. These tests are in order of how the employer should apply them to the individual employee; for example, only use the "Base of operations" test if "Localization of service" doesn't apply.

  1. Localization of service
  2. Base of operations
  3. Direction and control
  4. Residence

Localization of service

The first question employers should ask is whether the employee’s service is localized in the state. An employee’s work is localized if they work entirely from that state. It is also localized if the employee works primarily in that state and temporarily in other states. 

Is the employee’s service localized in one state? 

If YES, this is the state where the SUTA tax should be sent. If NO, move on to the base of operations test.

Base of operations 

If the employee's service is not localized in one state, the next step is to ask whether the employee performs some work in the state where their base of operations is located. “Base of operations” means the place where an employee begins work. It may also be where an employee:

  • Receives instructions or communications
  • Replenishes inventory
  • Repairs equipment
  • Performs any tasks relevant to their job

Does the employee perform some service in the state where their base of operations is located? 

If YES, this is the employee’s covered state. If NO, move on to the direction and control test. 

Direction and control

If there isn’t a base of operations, ask if the employee performs any work in the state where the service is directed and controlled. This means the place where the employer or manager supervises the employee’s work. 

Does the employee perform work in the state where the work is directed and controlled?

If YES, this is the employee’s covered state. If NO, move on to the residence test.

Residence

The residence test is used if the employee does not work in the state where their work is directed and controlled. This requires asking whether the employee conducts some work in the state where they live. 

Does the employee perform any service in the state where they live? 

If YES, this is the employee’s covered state. 

 

PLEASE NOTE: Rarely, an employee might not meet any of the four tests. If this is the case, you may be able to elect to cover the employee’s service in one state. 

Most states allow an “election of coverage” provision. It's best practice to check with your specific state for more information on election of coverage or reciprocal coverage rules.

 

Disclaimer: This blog post is for informational purposes only and should not be construed as legal advice. It is always advisable to consult counsel relative to your specific situation and jurisdiction.

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