Most business owners don’t realize how multi-state payroll can quickly lead to compliance penalties. If you have employees working across state lines, you’re likely responsible for allocating their wages and paying unemployment taxes to multiple states. Confused? Don’t worry—this guide explains everything you need to know to avoid costly mistakes and stay compliant.
Do You Need to Pay Unemployment Taxes by State?
In short, yes. As your accountant correctly pointed out, state unemployment insurance (SUI) laws require that employers pay taxes where the work is performed. These funds are essential for unemployment benefits—but navigating the rules can be tricky, especially with employees in multiple states.
Here’s why localization matters:
- Each state administers its SUI program independently, meaning different rules apply depending on where your employees work.
- The IRS mandates that businesses comply with state-specific employment tax laws, so ignorance is not a valid defense in case of an audit.
Understanding these laws now will save you headaches—and money—later.
How to Determine Which State Gets the Taxes
So, how do you figure out which state to assign unemployment taxes to? States typically consider where an employee’s work is localized—a concept that can include multiple factors:
Example: A company in California hires a remote worker in Nevada. If the worker spends two days in California and three days working remotely in Nevada, you may need to allocate wages to both states based on those numbers.
But what if employees split time between many states? This is where the Interstate Reciprocal Coverage Arrangement can simplify things.
What is the Interstate Reciprocal Coverage Arrangement?
This agreement allows you to elect a single state for unemployment taxes, even if an employee performs work in multiple ones. While it reduces administrative burden, applying for the arrangement demands careful documentation and compliance with specific rules.
To determine eligibility, consult your accountant or payroll provider. Keep in mind, incorrectly applying the arrangement could cost you.
The Best Payroll Tools for Multi-State Businesses
Handling multi-state payroll manually? That’s a recipe for errors. Instead, let payroll software take the wheel. Here are some top tools:
- Gusto: Perfect for small businesses, it automates unemployment tax calculations and location tracking. Pricing starts at $40/month + $6 per person.
- ADP Workforce Now: Ideal for larger businesses with complex payroll needs. Robust but pricier and may require setup help.
- Paychex Flex: Offers geo-fencing and detailed tracking but may be overkill for smaller firms.
Evaluate your business size and needs before committing to a solution.
Why Compliance Matters Now More Than Ever
States are becoming more aggressive in enforcing unemployment tax compliance, especially with the rise of remote work. Did you know that the number of U.S. remote workers has grown by 91% since 2019 (Statista, 2024)? This surge means interstate payroll issues are no longer niche—they’re a widespread challenge.
Avoid fines, back taxes, and sleepless nights by staying proactive. Track where your employees work, leverage software to streamline processes, and consult an expert if you’re unsure.
The Bottom Line
Multi-state unemployment tax laws might feel overwhelming, but you don’t have to tackle them alone. With the right tools and expert advice, you’ll save time, money, and stress, leaving you free to focus on growing your business.
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