It can be difficult, at times, to determine the correct state to report and pay unemployment taxes for an employee who performs services in more than one state. Reporting and paying unemployment taxes to the incorrect state can be both costly and time-consuming.
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.
If the employee performs services in only one state, the employee’s wages are subject to the unemployment regulations of that state. Generally, an employee’s unemployment wages are sourced and reported to the state where the services are localized. However, if services are performed in more than one state during a calendar year, unemployment wages will be reported to the state where a clear majority of services are being performed. Services are not considered localized when an employee’s work is equally divided between two or more states. In this case, the base of operations would be considered next. Note: If an employee’s services can be considered localized in a state, then the wages will be sourced to that state, and no further tests need to be reviewed.
2. Base of operations:
When an employee performs services that are not localized to a single state, then the employer will need to consider the employee’s base of operations in determining where to report the employee’s unemployment wages. The base of operations is generally considered the place from where the employee might return to receive instructions from the employer, replenish materials, perform work related to field functions or receive their next assignments. The base of operations may or may not be the place from which the employee receives direction and control. If the employee does not perform services in the state from which their base of operations is located, then the state from where the employee’s work is directed and controlled should be considered in determining where to report wages.
3. Place of direction and control:
If the employee does not have an identifiable base of operations, or if no work is performed in the state in which the base of operations is located, the employer would next consider the state from where the employee receives direction and control to be the state where wages will be reported. The state of direction and control is the location where the employer’s ultimate authority is exercised. This state is more often the company headquarters, rather than the location from which a manager directly supervises the employee’s performance. If the employee does not perform any services in the state from which they received direction and control, then the employee’s state of residence will be used to report their wages.
If the employee does not meet any of the previous three tests, unemployment wages will be reported and paid to the employee’s state of residence. Residence state, however, should only be used if some work is performed in that resident state.
The four reporting tests are based on the facts and circumstances of each employee and employer, which may change frequently based on the industry and services provided. When filing quarterly unemployment returns, employers should carefully review these tests to determine where unemployment wages should be reported and taxes paid for employees who perform services in multiple states.
Correcting improper reporting of unemployment to the state
If an employee’s wages were reported to the incorrect state, most states will waive interest and penalty charges associated with an amended filing. Additionally, employers who overpaid unemployment tax, or paid the tax to the incorrect jurisdiction, may be eligible for refunds. Employers with questions on how and when to apply the four tests should speak to their tax advisers.