Remote working arrangements have become commonplace in today’s workplace environment. As such, employers may have employees work anywhere and still be effective. However, these arrangements could create additional tax compliance requirements for employers. One such tax concern is state unemployment insurance taxes and determining which states have a reporting requirement for a fully remote employee in another state or a hybrid employee who works both in the office and from home. Which states require the wages for these employees to be reported for unemployment tax purposes?
The answer depends on the interstate reciprocal coverage arrangement unemployment tax rules for multistate employees, which 45 states have adopted. Alaska, Kentucky, Mississippi, New Jersey, and New York do not participate; neither does Puerto Rico. The purpose of this agreement is to provide for coverage under the unemployment compensation law of one state of services performed by an individual for a single employing unit for whom such services are customarily performed in more than one jurisdiction, to the end that duplication of contributions with respect to the same services be avoided and continuity of coverage of services customarily performed in more than one jurisdiction be assured.
FUTA Guidelines for Reporting Unemployment Wages
The Federal Unemployment Tax Act (FUTA) provides guidelines for reporting unemployment wages involving an employee who performs services in more than one state during a calendar year. Unemployment wages must be reported to only one state. All states use a series of tests promulgated by the U.S. Department of Labor to determine the correct state to report an employee’s wages for state unemployment purposes. Employers must review the tests in chronological order. Accordingly, if the first test does not apply, the next test is reviewed until the facts and circumstances involving your employee clearly demonstrate the state where the wages should be properly reported. These tests are:
- Localization of service: An employee’s work is localized if they work entirely from that state. It also is localized if the employee works primarily in that state and temporarily—in isolated situations—in other states.
- Base of operations: If an employee’s service is not localized in one state, you need to ask whether they perform some work in the state where their base of operations is located.
- Direction and control: If an employee’s service is not localized in one state and they do not perform any work in the state where their base of operations is located, you need to ask whether they perform some service in the state where direction and control are received.
- Residence: If an employee’s service is not localized in one state, they do not perform any work in the state where their base of operations is located, and they do not receive direction and control from a single state, you need to ask whether they reside in a particular state.
Essentially, an employer is not required to report wages and taxes to more than one state in any quarter, other than for employees relocating permanently during a quarter. This rule is applicable even for hybrid employees who are permanently working in one state for two or three days per week and another state for the remaining days, on an ongoing basis.
The state the employer remits unemployment taxes to is the state that funds the employee’s unemployment benefits. With most states participating in an interstate reciprocal coverage arrangement, employees seeking unemployment benefits would need to contact that state to obtain benefits.
Understanding unemployment benefit tax considerations for multistate employees can be challenging. Each situation can be unique and sometimes the four-part test may not give a black-and-white conclusion. If you’d like to learn more, please reach out to a professional at FORVIS.