Remote Workforce In Another State? Taxes May Get Harder For Some Companies

In today’s post-pandemic workforce, many employers have either allowed their workforce to remain remote or have begun hiring more geographically diverse employees and allowing them to work virtually on a permanent basis.  During the pandemic, the States gave employers a lot of latitude by allowing them to treat their employees in the state(s) they always had, but now that these roles are becoming permanent, the States are becoming stricter on their enforcement of rules regarding the tax status of remote, multi-state employees.  States are now forcing employers to treat them as employees of the states where they are performing services.

Because every state administers its own UI law, there needs to be a consistent way of applying the law across state lines, so that each State applies the same standards to determine which state receives its UI tax dollars, and which state law applies when a person becomes unemployed and files a claim.  Below is a description of the four tests used to determine which State to treat the employee.  There are several factors that could also complicate matters such as if they work in multiple states (salespeople) or if the employer is a non-profit organization, and we’ve broken that down as well.

The law has four tests to determine which state’s laws would apply (and of course where taxes should be paid). They are, in order of importance:

1. Where the work is localized
2. Base of operations
3. Place where work is directed or controlled
4. Place of residence

Let’s look at each one:

1. Localized work: Defined as where most of the work is performed. If they mostly worked in one state, but occasionally and temporarily worked somewhere else, then the work would be localized to the first state.  For example, If NY is where they normally work, then NY would be where the work is localized and you should treat them as a NY employee.  If they work in several different states without one being the usual location, then this test would not apply, and you move to the next one.
2. The base of operations:  If they live in MD but must come to the office in DC every day to pick up equipment, go to meetings to see clients, etc. then the base of operations would be in DC and therefore you should treat them as a DC employee.  If there is no base of operations, then this test would not apply, and you move to the next one.
3. The place where work is directed and controlled.  If the supervisor/dispatcher is in CA and directs the work from there, and the prior 2 tests have not been met, then you would treat them as a CA employee.  If the person(s) providing the direction and control are not in CA, then you would treat them as an employee of that state. If not, and there is no direction and control (or people in multiple states are directing their work), then this test would fail and:
4. Residence. Where they live, is what state’s laws apply. So, if all 3 tests fail, you’d have to treat them as an NJ employee if that’s where they live, you are a NY company.

Based on the above tests, if the person is determined to be an employee of a state for which you don’t currently pay UI taxes, you would need to “establish liability” by registering as an employer in that state and report quarterly wages as you do in your current state(s).

As mentioned above, there are several other factors to consider:

• A person may have multiple employers during the UI claim’s base period.  If that’s the case, they can choose which state to file their claim, and presumably, they’ll choose the one with the highest benefit rate.  If they’re savvy and aware of the UI law, they may also not be eligible in certain states, so they can choose the state where they are eligible.  In this case, you would receive a claim from a state you don’t currently have a UI account, but the States have a mechanism to charge your regular UI account for those benefits.
• If you are a non-profit employer, many states don’t consider you to be an employer liable for UI benefits unless you have 4 or more employees. That also means those employees who become unemployed may not be eligible to collect UI in that state.  Many states will allow you to treat them as an employee of your state if you’d like if you feel it unfair that that employee would not be entitled to UI.  As an example, if you are a NY non-profit employer with less than 4 employees and you have an employee working from KY, you can treat that person as a NY employee for UI purposes, report their wages on your quarterly payroll returns, and that person would be entitled to file a NY UI claim.

Contact us today to see what (if any) UI liability you may have for your remote workforce.

Industrial U.I. Services (IUI) is a nationally recognized leader in Unemployment Insurance Cost Control and Human Resource Services. IUI is proud to provide personal service by staff fully knowledgeable about the particular laws of each state in which its clients do business, from the inception of the UI claim through the entire hearing and appeal process. The Human Resource services include employee handbook development and implementation, policy development, management training including diversity equity, and inclusion (DEI), anti-harassment and compliance, and other vital and necessary HR support services.