• The U.S. DOL outlines considerations for multi-state employers to help determine unemployment taxes.
• Many states also have arrangements that allow employers to ask to report all wages paid to a multi-state employee differently.

Employers who have employees who do business in more than one state know all too well how easily tax questions can creep in. For instance, if an employee lives in one state and works in another, to which state should unemployment taxes be paid? What about a remote employee who works in several states? Fortunately, this question has been addressed by the U.S. Department of Labor. Employers must think through the following considerations in order.

1. Localization. If all or most of an employee’s services are performed within a particular state (any out-of-state services performed would be temporary or transient in nature), that would be the state to which unemployment taxes should be paid. If an employee lives in Arizona but works only in California, the person would be subject to California unemployment taxes.
2. Base of operations. If an employee’s services are not localized in a particular state, the employer should then consider the location of the employee’s base of operations. 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 an employee frequently works in both California and Arizona, but regularly reports to a main office in Arizona, the person would be subject to Arizona unemployment taxes.
3. Place of direction and control. When the first two factors do not apply in any state, the employer should consider the place from which the employer exercises direction and control over the employee’s services. If an employee works in Nevada, Arizona, and California, but receives regular direction from an office in Nevada, the person would be subject to Nevada unemployment taxes.
4. Residence of employee. In rare cases, none of the first three considerations will lead an employer to a conclusion. Where this is the case, an employer may consider the employee’s state of residence. An employee who lives in Utah, works in many different states, has no base of operations, and no single location from which the person receives direction would be subject to Utah unemployment taxes.

While these tests may be used by employers in all states, many states also have the Interstate Reciprocal Coverage Arrangement, which allows employers to request to report all wages paid to a multi-state employee to any state in which services are performed, the employee has a residence, or the employer maintains a place of business. Employers would need to contact the relevant states for more details on such an arrangement.