Does your business have locations and/or employees in different states?
If your business has locations in more than one state and/or employees who live in one state and work in another, chances are you have questions about which state(s) the SUTA (unemployment) tax applies to.
Here’s a detailed explanation that should help you understand how it all works.
Unemployment tax rules for multi-state employees depend on the employee’s work scenario.
To make the state unemployment determination, follow the Department of Labor’s Localization of Work Provisions. Use these provisions to find out which state the employee has “employment” in, and is therefore covered by.
There are four “tests” employers can use to determine which state an employee is covered by for unemployment purposes (aka, the state SUTA tax goes to):
1. Localization of service
2. Base of operations
3. Direction and control
Only move onto the next test if an employee’s situation doesn’t fit the test. For example, if an employee’s service is localized, don’t use the base of operations test.
Localization of service
The first question you must 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 isolated situations—in other states.
So, is the employee’s service localized in one state?
If YES, this is the state you send the SUTA tax to. If NO, move on to the base of operations test.
Base of operations
If your 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. “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
So, 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 directions 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 you, as the employer, or a 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.
Use the fourth part of the test if the employee does not work in the state where their work is directed and controlled. This residence test requires you to ask whether the employee conducts some work in the state where they live.
So, does the employee perform any service in the state where they live?
If YES, this is the employee’s covered state.
Still a no?
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 employers to do this under an “election of coverage” provision or under the “Interstate Reciprocal Coverage Arrangement.”