Multi-State Taxation And State Unemployment Insurance

If an employee works in more than one state, to which state must the employer pay state unemployment tax? Employment of a person considered from the standpoint of where services are performed falls into four classes:

• Services performed entirely within the U.S. or a state
• Services performed partly within the U.S. or a state
• Services performed entirely outside the U.S. or a state
• Services performed by U.S. citizens working overseas

The general rule is, if an employee works entirely within a state, the employment is covered by that state's law. If an employee works partly within and partly outside a state, the employee must be allocated to the jurisdiction of the proper state based on four statutory factors. Once properly allocated, contributions are payable to that state on the employee's entire services performed within and outside the state. Generally, work performed entirely outside a state or the U.S. is not covered employment for purposes of state unemployment tax. There are two exceptions:

• If the employee's work is completely outside the state but the employer elects to cover the employee for that state due to the fact that the employee is a resident of that state
• Use of reciprocal statutes that allow coverage in a state even though no work is performed in that state

All states extend coverage to U.S. citizens working abroad (except in Canada) for U.S. employers. A worker is covered in the state where the employer's principal place of business is located. Or, if there is no such state, in the employer's state of residence (individual employer), state of incorporation or the state where the majority of partners or trustees reside if the employer is a partnership or trust; otherwise coverage is provided by the state where the employer elects coverage and a benefit claim is filed. All states have adopted a uniform set of four factors used to properly allocate employees who work in more than one state. Payroll departments must know all of the following factors:

• Where the individual's work is “localized“ (the state where the employee works the most)
• Where the “base of operations“ is (the state where the main work force is located)
• Where the place of “control“ is (the state where the company headquarters are)
• When the place of residence governs (the state where the employee lives)

Most states have adopted legislation allowing for reciprocal arrangements with other states, under which unemployment services are covered in one state at the election of the employer. For an HR Generalist, managing multi-state tax and human resources compliance requires strict adherence to labor law. Under the arrangement, the employer is permitted to elect to cover all services of a worker in any state in which:

• Any part of the worker's service is performed
• The worker has his or her residence
• The employer maintains a place of business

These states accept and pay contributions on each other's behalf to ensure that interstate employees are not covered by more than one state's law and that the employees' rights to benefits are protected. All payroll training should emphasize that wage reporting must align with FLSA standards and maintain HIPAA privacy for employee records. Payroll professionals should check with each state in which business is conducted or employees reside to determine if a reciprocal agreement is in place.