Although federal tax laws provide uniform requirements for employers to pay federal unemployment taxes on wages, the differences among state unemployment laws can cause confusion. When an employee works in one state and lives in another, it creates a situation in which employers may need to withhold income taxes based on the state in which a worker resides and unemployment taxes based on the state in which the worker performs most of his work.
Take the Location Test
In many cases, the state in which your employee lives has little bearing on the state in which you file state unemployment taxes. Employers file unemployment taxes in the state in which the employee performs most of his work.
If your employee reports to your place of business and performs most of his services there – or your services are principally used in a single area – you pay unemployment taxes based on the state in which the worker performs his duties, not the state in which he lives, says The National Law Review. In this case, you pay unemployment taxes to the state in which your business is located.
Read More: Do You Pay Taxes on Unemployment?
Use Other Tests
If your employee doesn’t perform work from a fixed location, such as a salesman who travels around the country, employers must pay unemployment taxes based upon where he maintains a base of operations. Pay unemployment taxes in the state in which he receives mail, performs administrative functions and houses records for his businesses.
This may be the state in which he resides, the state your offices are located or a third state. If your worker doesn’t maintain a base of operations, such as a truck driver who lives out of his truck, you pay unemployment taxes to the state from which he receives his instruction. In this case, that’s the state from which you supervise him.
Read More: Do the Self-Employed Pay Unemployment Taxes?
Out of State Unemployment Claims
If your employee who lives out of state loses his job and applies for benefits, where he applies depends upon the laws of both states. In many cases, workers file unemployment claims from the state in which they reside, and their unemployment agency requests funds from other states to pay the claim.
Some states, such as Texas, allow a worker who lived out of state to claim benefits based upon workplace location, say the Texas Workforce Commission. If your state allows this, your employee must still meet all criteria for continued unemployment benefits in your state.
Unemployment Taxes vs. Income Taxes
The rules that govern which state receives unemployment taxes and the state that receives income taxes withheld from the employee’s earnings differ greatly. While it’s likely you’ll pay unemployment taxes to the state in which your business performs, income tax withholding must be based solely on the employee’s state of residence.
In some cases, states develop reciprocal agreements in which workers in nearby states are taxed at the rate of the state in which they work. Check with your state’s department of revenue to determine whether your employee’s home state has a standing agreement with your state.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.