Revenue Ruling 83-34: State Unemployment Tax Rules

Employers with personnel who perform services in more than one state face a challenge regarding their unemployment tax responsibilities. Because each state administers its own unemployment program with unique tax rates and wage bases, it can be unclear which jurisdiction’s rules apply. To address this, a uniform framework provides a clear and consistent method for determining a single state for unemployment tax reporting. This standardized approach ensures that an employee’s wages are reported to only one state for any given period, preventing duplicate contributions and simplifying compliance for the employer.

The Sequential Tests for State Determination

The framework uses a series of tests from the Federal Unemployment Tax Act (FUTA) that employers must apply sequentially. The analysis stops as soon as one test is met, which determines the state for tax purposes. The tests are:

• Localization of service: This test determines if an employee’s work is localized within a single state. An employee’s service is considered localized if it is performed entirely within one state, or mostly in one state with any work performed outside that state being incidental, temporary, or transitory. If an employee’s service is localized, that state is designated for unemployment tax purposes.
• Base of operations: If an employee’s service is not localized, this test identifies the state where the employee has a fixed center of operations, such as an office or a specific location they customarily work from. It is the place from which the employee starts their work or where they return to file reports or receive instructions.
• Place of direction and control: If the employee has no base of operations, this test pinpoints the single location from which the employer exercises ultimate authority and control over the employee’s work. This is the location of the supervision and management that directs their employment.
• Employee’s residence: Should the previous tests not yield a conclusive answer, the final test is the employee’s residence. In this scenario, the state where the employee resides becomes the default state for reporting and paying unemployment taxes, serving as a conclusive tie-breaker.

Applying the Tests in Practice

To apply the tests, an employer must gather information about the employee’s work arrangements. This includes the employee’s legal residence, the corporate headquarters address, the location of their direct supervisor, and records of where services are performed, such as travel logs.

The localization of service test is the simplest to apply. For example, a consultant who works full-time at their employer’s office in one state but travels to a neighboring state for a one-day client meeting twice a year would be subject to this test. Because the out-of-state work is temporary and incidental to their primary job functions, their service is considered localized, and the employer would report unemployment taxes to the state where the office is located.

When an employee’s work is not localized, the base of operations test is applied. A regional sales representative who lives in one state but is required to report to a specific branch office in a neighboring state every Monday would be an example. At this office, they submit weekly expense reports and plan their sales calls. This office constitutes their base of operations, and the employer would report unemployment wages to that state.

If the localization and base of operations tests are not met, the direction and control test is considered. This applies to a fully remote software consultant who lives in one state but travels to client sites in several others, with no fixed office. If all project assignments, performance reviews, and work instructions originate from a single manager at the company’s headquarters in another state, that state becomes the location of employment for tax purposes.

The employee’s residence test applies when the other tests do not provide a clear answer. Consider an interstate truck driver who lives in one state and transports goods across the country. The driver receives dispatch instructions from various terminals and does not have a single office or manager. Because neither a base of operations nor a single place of direction and control can be established, the driver’s state of residence is used.

State Registration and Tax Reporting

Once the correct state is identified, the employer must register with that state’s workforce agency to obtain a State Unemployment Insurance (SUI) account number. This process can often be completed online by submitting an application with business and employee details.

With a SUI account, the employer must file quarterly unemployment tax returns. These returns report total wages paid to employees covered by that state’s system and calculate the SUI tax due. The tax is found by applying the employer’s assigned rate to taxable wages, up to the state’s annual wage base limit.

Paying state unemployment taxes correctly impacts federal obligations. The Federal Unemployment Tax Act (FUTA) imposes a separate payroll tax reported annually on Form 940. Employers who pay their state taxes on time receive a credit against their FUTA liability, which can reduce the federal tax rate from 6.0% to 0.6% on the first $7,000 of each employee’s wages.