State Unemployment Insurance (SUI) for Remote Employees: The 4-Factor Test

State Unemployment Insurance (SUI) is one of the most commonly misunderstood employer payroll obligations, particularly in the multi-state context. Many employers assume SUI is always paid to the state where the employee works, but the actual rule is more nuanced. The American Payroll Association, drawing on U.S. Department of Labor regulations, applies a four-factor test to determine which state receives the SUI tax for a given employee. Getting the analysis right matters because SUI registration in the wrong state can produce back taxes, penalties, and wage-reporting discrepancies that take years to unwind.

What SUI is

State Unemployment Insurance is an employer-side payroll tax that funds unemployment benefits paid to eligible workers who lose their jobs. SUI is paid by the employer, not withheld from employee wages, although a few states including Alaska, New Jersey, and Pennsylvania also require a small employee contribution. SUI rates and wage bases vary significantly by state, with rates ranging from below 1 percent to above 4 percent of wages and wage bases ranging from the federal minimum of $7,000 to more than $68,000 in some states.

SUI is distinct from federal unemployment tax, which is administered by the IRS under the Federal Unemployment Tax Act (FUTA). FUTA tax is paid separately at 6.0 percent on the first $7,000 of wages per employee, with a credit of up to 5.4 percent for state SUI taxes paid, resulting in a net FUTA rate of 0.6 percent for employers in states with compliant SUI programs. Employers must register for state SUI accounts in each state where they have employees subject to SUI, file quarterly wage reports, and pay quarterly SUI tax. Failure to do so can produce FUTA credit reductions and state-level penalties.

Why SUI is not always tied to the work state

The common misconception is that SUI is always paid to the state where the employee physically performs the work. This is often true for employees who work entirely in one state, but it is not the rule for multi-state employees. The actual rule, codified in U.S. Department of Labor regulations and reflected in the American Payroll Association guidance, applies a four-factor test in a specific order. The state that satisfies the first applicable factor receives the SUI tax, even if other states have a stronger connection to the employee.

The four-factor test

The four-factor test, as described in the American Payroll Association guidance and rooted in U.S. Department of Labor regulations, applies four factors in a specific order. The first factor is localization: is the work performed entirely in one state, or is the bulk of the work performed there with only incidental work elsewhere? The second factor is base of operations: where is the employee's permanent office or the location from which the employee is regularly directed? The third factor is direction and control: from where is the employee directed and controlled in performing the work? The fourth factor is residence: if no other state applies, where does the employee reside?

The factors are applied sequentially, not weighed against each other. If the first factor produces a definitive answer, the analysis stops and that state receives the SUI tax. If the first factor does not produce a definitive answer, the analysis moves to the second factor, and so on. The sequential application means that an employee's residence state receives SUI only if none of the other factors produces a definitive answer, which is relatively rare in practice.

Factor 1: Localization

Localization is the first and most commonly applied factor. Work is localized in a state if all of the employee's work is performed in that state, or if most of the work is performed in that state and the work performed elsewhere is incidental. The U.S. Department of Labor generally treats work as incidental if it represents less than 10 percent of the employee's total working time, although the precise threshold can vary by state and by context. If the work is localized in one state, SUI is paid to that state, regardless of the employer's location or the employee's residence.

Factor 2: Base of operations

Base of operations is the second factor, applied only if localization does not produce a definitive answer. The base of operations is the employee's permanent office or the location from which the employee is regularly directed. For an employee with a permanent office in one state who performs substantial work in another state, this factor may direct SUI to the office state.

Factor 3: Direction and control

Direction and control is the third factor, applied only if localization and base of operations do not produce definitive answers. Direction and control refers to the location from which the employee is directed and controlled in performing the work. For an employee whose supervisor is located in one state and who performs work in multiple states, this factor may direct SUI to the supervisor's state. It is most often relevant for traveling employees whose work is spread across multiple states without a clear dominant location.

Factor 4: Residence

Residence is the fourth and final factor, applied only if none of the other factors produces a definitive answer. If the employee's work is not localized in any state, the employee has no clear base of operations, and the direction and control are not clearly from any state, SUI is paid to the employee's state of residence. This factor is rarely the controlling factor in practice, because most employees have a clear dominant work location, base of operations, or direction-and-control location.

How each factor is applied, with DOL examples

The U.S. Department of Labor provides examples illustrating the application of each factor. For localization, an employee who works entirely in Virginia for a Maryland employer has work localized in Virginia, and SUI is paid to Virginia. For base of operations, a traveling salesperson who works in multiple states but reports to a permanent office in New York has a base of operations in New York, and SUI is paid to New York if localization does not apply. For direction and control, an employee who works in multiple states without a permanent office but is directed from a Texas headquarters has direction and control from Texas, and SUI is paid to Texas if localization and base of operations do not apply.

For residence, an employee who works in multiple states without a clear base of operations or direction-and-control location and who lives in Florida has SUI paid to Florida. The residence factor is the fallback when no other factor applies, and it is invoked only in unusual cases. The sequential application means the analysis is structured and predictable, although the underlying facts can be complex.

The localization rule in detail

The localization rule has several sub-rules that determine its application. The most important is the 90 percent rule, which provides that work is localized in a state if at least 90 percent of the employee's total working time is spent in that state, even if some work is performed elsewhere. The remaining 10 percent is treated as incidental work and does not defeat localization. The 90 percent threshold is a general guide, and states may apply slightly different thresholds in specific contexts.

The localization rule also addresses work performed in multiple states. If an employee performs substantial work in two or more states and no single state accounts for 90 percent or more of the work, localization does not apply and the analysis moves to the base-of-operations factor. Occasional work performed in another state, such as attending a conference or training, may be treated as incidental and not defeat localization in the primary state. Employers should maintain contemporaneous records of employee work locations to support the localization analysis in case of audit.

Worked example 1: VA employee works entirely from VA for a MD employer

Consider a Virginia employee who works entirely from her Virginia home for a Maryland employer. All of her work is performed in Virginia, so the localization factor is satisfied and SUI is paid to Virginia. The employer must register for a Virginia SUI account, file quarterly wage reports with Virginia, and pay Virginia SUI tax on the employee's wages up to the Virginia wage base. The employer's location in Maryland does not affect the analysis, because localization is the controlling factor.

The result is intuitive but often overlooked by Maryland employers who assume SUI should be paid to Maryland because that is where the employer is headquartered. The localization rule is clear: the state where the work is performed controls, regardless of the employer's location. The Virginia SUI rate and wage base apply to the employee's wages.

Worked example 2: NJ employee works 3 days in NJ, 2 days in NY for NY employer

Consider a New Jersey employee who works 3 days per week from her New Jersey home and 2 days per week at her employer's New York office for a New York employer. Over the course of a year, she works approximately 156 days in New Jersey and 104 days in New York. The localization factor does not apply because her work is not concentrated in either state at the 90 percent threshold. The analysis moves to the base-of-operations factor.

Her base of operations is the New York office, where she reports 2 days per week and from which she is regularly directed. SUI is paid to New York, and the employer registers for a New York SUI account. The base-of-operations factor controls when localization does not apply, even though she spends more days in New Jersey.

Worked example 3: Fully remote employee in TX for CA employer

Consider a fully remote employee who lives and works in Texas for a California employer. All of his work is performed in Texas, so the localization factor is satisfied and SUI is paid to Texas. The employer must register for a Texas SUI account, file quarterly wage reports with Texas, and pay Texas SUI tax on the employee's wages up to the Texas wage base. The employer's location in California does not affect the analysis, and California SUI is not paid on this employee's wages.

The result is important because California SUI rates and wage bases are significantly higher than Texas rates and wage bases. California's SUI wage base for 2025 is $7,000, but rates can range up to 6.2 percent for new employers, while Texas has a wage base of $9,000 and lower new-employer rates. Getting the SUI state right in this scenario can save the employer several hundred dollars per year per employee, and getting it wrong can produce back taxes, penalties, and wage-reporting discrepancies.

Reciprocity for SUI

The Interstate Reciprocal Coverage Arrangement is a multi-state agreement that allows employers to assign certain multi-state employees to a single state SUI account under specific circumstances. The arrangement is administered by the participating states and is intended to simplify SUI compliance for employees whose work spans multiple states. Approximately 14 states currently participate, including Arkansas, Colorado, Idaho, Iowa, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.

The arrangement is not the same as income tax reciprocity, which applies to withholding rather than SUI. Income tax reciprocity agreements between certain pairs of states allow residents of one state who work in the other to be exempt from withholding in the work state. The Interstate Reciprocal Coverage Arrangement operates differently and applies only to SUI. Employers should not assume that income tax reciprocity automatically extends to SUI, and vice versa.

SUI registration and reporting

SUI registration and reporting follow a similar pattern across states, although the specifics vary. Registration is typically completed online through the state unemployment agency's employer services portal and requires the employer's federal Employer Identification Number, legal name, address, and entity type. Once registered, the employer receives a state SUI account number and a new-employer rate assignment.

Quarterly reporting requires the employer to file a wage report listing each employee's wages for the quarter, along with a return showing total wages, taxable wages, and SUI tax due. Reports are due at the end of the month following each calendar quarter: April 30 for Q1, July 31 for Q2, October 31 for Q3, and January 31 for Q4. Late filing can produce penalties, and continued non-filing can result in the loss of the FUTA credit.

SUI rate ranges

SUI rates vary widely by state and by employer experience rating. New employer rates typically range from approximately 1.0 percent to 4.0 percent of wages up to the state wage base, with construction industry employers often assigned higher new-employer rates. After an experience-rating period of typically three to four years, the rate is adjusted based on the employer's actual benefit-charge experience, with rates ranging from below 0.5 percent for stable employers to above 10 percent for employers with high benefit claims.

Wage bases also vary widely. Several states, including Arizona, California, Florida, and Ohio, use the federal minimum wage base of $7,000. Other states have significantly higher wage bases, with Washington at $68,500, Hawaii at $56,700, and Connecticut at $26,100 for 2025. The combination of rate and wage base can produce substantial differences in SUI cost per employee across states, and multi-state employers should monitor each state's rate and wage base annually.

Common SUI mistakes

Several common mistakes generate SUI exposure and unnecessary cost. The first is registering in the wrong state, typically the employer's headquarters state rather than the state where the employee's work is localized or where the base of operations is located. The second is missing wage base changes, which can produce underpayment or overpayment of SUI tax and require amended returns. The third is failing to appeal rate assignments, particularly for new employers who believe the assigned rate does not reflect their actual experience.

Another common mistake is failing to file quarterly wage reports on time, which can produce penalties and, in extreme cases, loss of the FUTA credit. Multi-state employers should maintain a compliance calendar listing each state's filing deadlines and should automate the filing process where possible. A simple annual review of the SUI state for each employee can identify errors that would otherwise compound over multiple quarters.

What to do next

If your company has employees in multiple states, start by mapping each employee to the correct SUI state using the four-factor test. For each employee, document which factor controls and why, and verify that the company is registered for an SUI account in that state. Maintain a compliance calendar listing each state's quarterly filing deadlines, and verify each state's wage base annually to ensure accurate tax computation. If you have identified SUI errors, contact the affected state agencies promptly to discuss correction options, and consider engaging a payroll service provider or SUI specialist to manage ongoing compliance. Run our multi-state withholding calculator to verify income tax withholding for each employee, and consult a licensed payroll tax professional for a comprehensive SUI review if your workforce is multi-state.