ETS Tax Intelligence: Multi-State Unemployment Tax Issues
The beginning of a new calendar year is the perfect time for employers to review current payroll reporting practices to identify and rectify any inappropriate pay practices and review the prior year’s filings for potential refund opportunities. This review should include an analysis of state unemployment insurance (“SUI”) sourcing rules and utilization of out-of-state (“OOS”) wage credits. If employees were improperly sourced (i.e., reported) or OOS wage credits were not applied, amended returns should be filed to make certain the appropriate amount of tax is paid to the proper taxing jurisdiction and overpayments are timely refunded.
In order to avoid duplicate taxation when an employee works for one employer in more than one state, all states have adopted a uniform set of statutory factors to determine where SUI wages should be sourced (pursuant to U.S. DOL UIPL 20-04). These “four factors” are applied in the order of priority presented in the table to the right and should ultimately result in the sourcing of SUI wages to a single state even when an employee works in multiple states during a calendar year.
For example, John Doe is a district manager spending an equal amount of time in Alabama and Florida. He maintains an office at his employer’s headquarters in Florida. Using the guidelines above, John Doe’s wages for SUI purposes should be sourced to Florida, the “base of operations.” The table to the left illustrates the potential overpayment associated with improper reporting of John Doe’s wages to two work-states – doubling the amount of tax that should be paid. This tax overpayment would be magnified if other similarly situated employees existed.
There can be a change in a SUI sourcing state, even mid-year, that is triggered by a permanent change in the employee’s circumstances. For example, if John Doe were promoted to regional manager solely responsible for New York, under the “localization of services” factor the new SUI sourcing state would become New York.
OOS Wage Credits
When there is a permanent change in the SUI sourcing state, an OOS wage credit analysis should be completed. OOS wage credits allow employers to apply taxable wages paid by the employer in the former sourcing state against the taxable wages paid in the new sourcing state. Continuing with the above example, John’s employer is allowed a credit for taxable SUI wages paid in Florida, up to the annual taxable wage base, in calculating the taxable wage base in New York. As illustrated to the right, an overpayment of New York tax results if OOS wage credits are not properly applied. This tax overpayment would be magnified if other similarly situated employees existed.
For employers looking to minimize SUI tax costs, understanding and applying the SUI sourcing and OOS wage credit rules is critical to appropriately paying taxes. Equifax assists employers by reviewing current payroll reporting practices to help employers with identifying and recovering potential tax overpayments. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog for information on other employment tax matters that might impact your organization.
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