Determining Taxes for Multi-state Employers

In general, an employer should pay employment taxes to the state which an employee physically works in. For example, if your business is located in Massachusetts, but you hire an employee working remotely from home in Oregon, you most likely should be withholding Oregon state income tax from that employee, as well as paying Oregon unemployment and paid leave taxes on that remote worker, opposed to Massachusetts taxes.

In some cases, employers may be considered “multi-state” employers, meaning they have one or more employees who work in several states throughout the year because they travel to various job sites and are not always working in one place all of the time.

Generally, the withholding tax should be withheld and paid to the various states the employee is working in, yet the unemployment and paid leave taxes will get reported to only ONE state, and will not be split up amongst multiple states.

Below is a summary of the US DOL Localization of Work Provisions. There are four “tests” you can follow to evaluate which state to apply the unemployment (and paid leave) taxes:

1. Localization of service - does the employee work entirely from one state?

(It is also localized if the employee works primarily in that state and temporarily in other states).

➡️ If the employee is localized in one state – this is the state for their unemployment and paid leave taxes. If not, move to base of operations test.

2. Base of operations - the place where an employee begins work or where an employee: Receives instructions or communications, replenishes inventory, repairs equipment, performs any tasks relevant to their job.

➡️ If the employee performs some service in the state where their base of operations is located – this is the state for their unemployment and paid leave taxes. If not, move to the direction and control test.

3. Direction and control - does the employee perform any work in the state where the service is directed and controlled (the place where the employer/manager supervises the employee’s work)?

➡️ If so, this is the state for their unemployment and paid leave taxes. If not, move to the residence test.

4. Residence - does the employee conduct some work in the state where they live?

➡️ If so, this is their state for unemployment and paid leave taxes.