Multi-State Unemployment Tax Compliance: Are You Paying Too Much?
For many employers the determination of state unemployment insurance tax (“SUI”) liability is straightforward.
The employer multiplies the SUI rate provided from the state by the employee’s wages up to the state’s wage base. The employer generally remits the SUI to the state where the employee performs services. However, complexities arise when an employee performs services in more than one of the 53 jurisdictions (all 50 states plus the District of Columbia, Puerto Rico and the Virgin Islands) with SUI provisions. Many multi-state employers pay SUI in every state where an employee performs services. This may result in an overpayment of an employer’s total SUI expense. Quite often these overpayments create refund opportunities for an employer.
Although states have considerable freedom in drafting and administering SUI laws, the federal government must approve such laws before employers can receive credit (up to 5.4 percent) against the tax imposed under the Federal Unemployment Tax Act (“FUTA”) for contributions made under state law. Fortunately for employers, the U.S. Department of Labor (“DOL”) has promulgated rules and regulations that provide guidelines for determining the jurisdictions to which multi-state employers must remit SUI. The DOL, through the Employment and Training Administration division, has created a uniform definition of employment in terms of localization of work. This definition consists of four factors applied in successive order to a multi-state employee’s fact pattern to determine the single jurisdiction to which an employer must remit SUI. These factors are summarized from the DOL’s Manual of State Employment Security Legislation.
The first factor looks to see if the services are “localized” within a state. Services are considered localized within a state if the service is performed entirely within such state. If the service is performed both inside and outside the state, but the service performed outside of the state is incidental to the individual’s service within the state, then the service is treated as localized within such state. If it is determined that the employee’s services are localized within a state, the SUI for that employee is reported to that state and the additional factors need not be considered. If the employee’s services are not considered localized then the employer should look to one of the following three factors.
Base of Operations
If the service is not localized in any state, but the base of operations and some of the service is performed within the state, then the employee’s entire service should be reported to this state. A base of operation can be the place where an employee reports to work, has an office, receives instructions, mail and supplies, or keeps business records. If the employee’s services are not localized and the employee doesn’t have a base of operations the employer should look to one of the following two factors.
Direction and Control
If the employee’s work is not localized and there is no base of operations, but there is direction or control in one of the states where the employee performs services then the entire service should be reported to this state. A place of direction or control refers to a facility from which the employer can exercise immediate control over the employee’s services. If there is no place of direction or control, localized services, or base of operations, then the employer should look to the following factor.
In rare instances where none of the three previous factors can be applied, the state of the employee’s residence will have jurisdiction.
When an employer misapplies the four factors, the result may be an overpayment of state unemployment tax. For example, assume an employee performs services in four states within a single calendar year and the employee earns approximately $15,000 in each state. If an employer pays SUI in each state in which the employee performs services, the employer could pay four times the required SUI liability.
Many states have provisional arrangements contained in their statutes allowing employers who have multistate employees performing services in multiple states to pay unemployment taxes to one state where the employees have met one of the four factors. Generally, these arrangements cover services that are typically performed by employees who contract by the job and whose various jobs are located in different states. For example, a construction worker who works for an Illinois firm on a six-month assignment in Minnesota and then goes to Indiana for a six-month assignment, might be covered under Minnesota and Indiana laws for the services performed in each state. Under the provisional arrangement, the Illinois employer could elect to have all the services performed by the construction worker covered under the Illinois unemployment act. Therefore, the employees who meet one of the four factors in any one state may not be required to pay SUI in multiple states. Employers who have multistate employees and meet one of the four factors for more than one state may be entitled to a refund from states in which the employees have worked and SUI was paid.
During an employee’s term of employment the factor used to determine the state in which unemployment tax is due may change (e.g., when an employee is permanently transferred to another state). If the factor is such that the employee is now subject to unemployment tax of another state, the employer may have the option to take advantage of the taxes already paid in a previous state. This will result in SUI savings because the additional SUI paid will only be to the extent of the current state’s unemployment wage base. It is typical for a company that transfers employees to work on projects in different states within the same calendar year to restart the state unemployment taxable wage base when the employee is transferred to the new state. However, the employer may be able to take credit for taxes paid under another state unemployment compensation law.
For example, an employer has 1,000 employees that provide services in Illinois where the employer’s Illinois Unemployment Insurance Rate is 3.1 percent and the SUI wage base is $9,000. On July 1st of the current calendar year the employer transfers all 1,000 employees to Minnesota where the employer’s Minnesota unemployment insurance rate is 5.4 percent and the SUI wage base is $22,000. The employer computes and pays the Minnesota unemployment tax for each employee on $22,000 of wages. Under these facts, the company overpays tax as follows:
|Minnesota Unemployment Insurance Tax Paid (1,000 X 22,000) X .054||$1,188,000|
|Correct Minnesota Unemployment Insurance Tax||702,000|
|Amount of Over Payment||$486,000|
As a best practice, employers should review their SUI filings at least annually. Situations such as employees working in multiple jurisdictions and changes in employment related to acquisitions, expansions, or relocations can be managed for tax savings.