Payroll in Practice: 3.20.2023

Question: An employee is a resident of Louisiana and works remotely from home for an employer located in Wisconsin. During the summer months the employee works remotely from a second residence in Michigan and works one or two days a week at the employer’s Wisconsin location. Is the employer liable for state unemployment tax to all three states?

Answer: Generally, for a given employee, an employer will pay state unemployment tax to only one state. An employer may incur liability to different states for different individual employees. An exception to the one state per employee rule occurs when the employer transfers an employee to a different state and the transfer is intended to be permanent.

The question suggests that the employee is working in Louisiana more than half the year, and for the remaining portion of the year the work is divided between Michigan and Wisconsin. In that case, the employee’s work is localized in Louisiana. Under Louisiana law, an employer is responsible for Louisiana unemployment taxes if the employer employs at least one individual for some portion of a day during 20 or more calendar weeks in a calendar year and pays at least $1,500 in wages during any quarter during that calendar year.

If the employer had not been covered—for example if three employees were required for coverage instead of one—the employer might elect to use a voluntary or reciprocal coverage arrangement to cover the employee in another state where the employer had coverage, such as Wisconsin or Michigan.

There is a hierarchy for determining which state should receive the wage report and taxes for an employee. Louisiana has a Multi-State, Offshore, & Overseas Liable State Determination table to assist employers in determining the jurisdiction for reporting and paying tax for a given employee. The guide lists each test category, the tests, and where to report wages based on the test.

Category 1, localization of services: If all services are performed in Louisiana or all services are performed in Louisiana except for temporary assignments out of state, the employer must report the wages to Louisiana. If services are evenly split among Louisiana and one or more other states, the employer is to go to the category 2 tests.

Category 2, employee’s base of operations: If the employee has a home, business location, or place from which the employee goes to perform services and returns after performing the services, the employer is to report the wages to the state where the home, business location or place is located. Some services must be performed in this location. If the employee does not perform services in that location or the employee does not have a base of operations, the employer is to go to the category 3 tests.

Category 3, place of direction and control: If the employee performs services in two or more states and receives direction and control from someone located in one of these states, or direction and control come from a state in which no services are performed but the employee travels to that state at least once a year, the employer is to report the wages to the state where the source of direction and control is located. If direction and control come from a state in which no services are performed, and the employee does not travel to the source state at least once a year, the employer is to go to the category 4 tests.

Category 4, location of employee’s address: If the employee currently lives in Louisiana the employer is to report wages to Louisiana. If the employee performs services in Louisiana and one or more other states and the employee resides in one of the other states, the employer is to report the wages to the state of residence. If the employee performs services in Louisiana and one or more other states and none include the employee’s resident state, the employer may elect coverage in one of the states where services are performed.

Category 5, offshore work, Mississippi River, and overseas employment: If the employee works within three miles of the Louisiana shoreline the employer is to report the wages to Louisiana. If the employee works outside three miles of the Louisiana shoreline, works on the Mississippi River, or works overseas for an American employer, the employer is to report the wages to the employee’s base of operations.

Most states have adopted similar criteria.

An alternative method to the hierarchical approach is the reciprocal coverage arrangement. Most states have adopted the Interstate Reciprocal Coverage Agreement. Under this agreement an employer may file an election to report an employee’s wages and pay contributions to only one state for an employee who customarily works in more than one state if any of these conditions apply:

Part of the employee’s services are performed in that state. The employee has a residence in that state. The employer maintains a place of business in that state to which the employee’s services bear a reasonable relationship.

The election is subject to approval by the selected jurisdiction and all interested jurisdictions.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.