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Last Week in Payroll: Localization of Work

Christopher Wood, CPP  

Christopher Wood, CPP  

A blog of some of the prior week’s more important federal, state and local payroll stories. This week’s focus is on the localization of work for multi-state employers regarding unemployment.

Localization of Work

In May of 2004, the U.S. Department of Labor (DOL) issued Unemployment Insurance Program Letter (UIPL) 20-04 to state workforce agencies regarding the localization of work provisions. The UIPL discusses the principles for determining where wages should be reported when work is performed entirely in one state or in a number of different states.

The purpose of the UIPL was to update examples of employment situations requiring uniform interpretation of localization of work provisions in state laws and to revise and reissue the interpretation of “localization of work” provisions. The guidance is aimed at helping multi-state employers determine to which state wages should be reported and unemployment taxes paid.

During the coronavirus (COVID-19) pandemic, many employees began working remotely. In a number of these situations, the employee’s remote work location is in a different state from the employer’s work location. Being familiar with the DOL’s “localization of work” provisions may be helpful to employers that want to make sure wages are reported and unemployment taxes are paid to the correct state.

In general, under state unemployment laws, workers’ wages are reported to the state where the work is performed. In order to avoid duplicate coverage or no coverage at all when a worker works for one employer in more than one state, states made an agreement on how to determine where wages are to be reported for unemployment purposes. In the 1940s, model state legislation was developed by the DOL and incorporated into all state unemployment laws. These provisions of state unemployment laws are called “localization of work” provisions.

The objective of “localization of work” provisions in state unemployment laws is to cover under one state law all of the service performed by an individual for one employer, wherever it is performed. These provisions of state law are typically applied in the following sequence:

  • Is the individual’s service localized in this state or some other state?
  • If his/her service is not localized in any state, does he/she perform some service in the state in which his/her base of operations is located?
  • If the individual does not perform any service in the state in which his/her base of operations is located, does he/she perform any service in the state from which the service is directed and controlled?
  • If the individual does not perform any service in the state from which his/her service is directed and controlled, does the individual perform any service in the state in which he/she lives?

The DOL’s “localization of work” provisions include a guide for determining the following four tests: (1) the place where work is localized, (2) the base of operations, (3) the place from which the service is directed or controlled, and (4) the place of residence. States also provide guidance similar to the UIPL.

Federal News

Draft instructions of Form 941 and schedules. The IRS has posted a June 2021 draft version of the Form 941, Employer’s Quarterly Federal Tax Return, instructions that take into account the amended and expanded coronavirus (COVID-19) pandemic tax credits and the new COBRA premium assistance credit from the American Rescue Plan Act (ARPA). The IRS also posted June 2021 draft versions of the instructions for Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers. The draft Form 941 instructions include the following five worksheets: (1) Credit for Qualified Sick and Family Leave Wages for Leave Taken Before April 1, 2021; (2) Employee Retention Credit for the Second Quarter of 2021 Only (Wages Paid After March 31, 2021, and Before July 1, 2021); (3) Credit for Qualified Sick and Family Leave Wages for Leave Taken After March 31, 2021; (4) Employee Retention Credit for Third and Fourth Quarters of 2021 Only (Qualified Wages Paid After June 30, 2021); and (5) the COBRA Premium Assistance Credit.

Cap reached for H-1B visas. The U.S. Citizenship and Immigration Services (USCIS) has announced that it has reached the cap for additional H-2B visas for the 2021 fiscal year ending on September 30.  The H-2B temporary non-agricultural worker program is designed to serve U.S. businesses unable to find a sufficient number of qualified U.S. workers to perform non-agricultural work of a temporary nature. Congress sets the annual H-2B visa limit at 66,000.

On April 20, 2021, 22,000 additional H-2B visas were made available due to a lack of temporary nonagricultural workers16,000 of the additional visas are available only for returning workers with the remaining 6,000 visas set aside for Northern Triangle nationals (Guatemala, Honduras, and El Salvador). The USCIS noted that within the first five business days of filing, it had received more petitions for returning workers than the allotted 16,000.

Webinar on reporting election worker earnings. The IRS Tax Exempt and Government Entities Division will conduct a webinar on June 24 titled: “Reporting Election Workers Earnings”. Election workers are individuals hired by government entities to perform services at polling places in connection with national, state, and local elections. Election workers may be compensated by a set fee per day or a stipend for the election period. The election period may include attending training or meetings prior to and after the election. Election workers may also be reimbursed for their mileage or other expenses. IRS regulations provide that an employer may choose to use separate Forms W-2 to report employee compensation derived from separate components. Therefore, amounts paid to an individual who provides both election worker services and non-election worker services can be reported on separate Forms W-2. Form 1099-MISC should not be used to report election worker payments. The IRS’s election worker webinar is on June 24, 2021 at 1:00 p.m. and will address the following: the workers who are considered election workers; the amount workers can earn without taxes being withheld; the difference between reportable and taxable wages; and training and expense reimbursements.

U.S. and Swiss governments agree on types of retirement plans exempt from withholding on dividends. The U.S. and Switzerland have announced the list of U.S. and Swiss pension and retirement arrangements, including individual retirement savings plans, that, under the U.S.-Switzerland Tax Treaty, are eligible for an exemption from tax withholding on dividends that they receive, provided that all other requirements of the Treaty are satisfied. The agreement is effective for dividends paid on or after January 1, 2020.

State and Local News

Delay in first quarter 2021 unemployment charging statements. The Colorado Department of Labor and Employment (DLE) has announced that there was a delay to the usual timing of the unemployment charging statements sent to employers in order to correct some charging on employer unemployment accounts. The first quarter 2021 statements were mailed on May 25, 2021. Employers have 60 days from the mail date to make a protest [Colorado DLE Employer Update, April 2021].

Bill to eliminate youth/training wages on governor’s desk. On June 8, 2021, legislation passed that would eliminate Delaware’s youth and training subminimum wages. Delaware law currently allows employers to pay a training wage (first 90 days for employees 18 or older) or a youth wage (employees under the age of 18) of $0.50 less per hour than the state’s $9.25 per hour minimum wage. House Bill 88 would remove these subminimum wages. The legislation is now on Delaware Governor Carney’s desk for consideration.

Significant tax bill passed. The Iowa legislature passed a significant tax bill modifying the state’s income tax laws. The bill would reduce the number of tax brackets to four (currently, there are nine tax brackets) with new rates, effective beginning in 2023. Additionally, current Iowa law grants an income tax exemption for forgiven federal Paycheck Protection Program (PPP) loans for tax years beginning on our after January 1, 2020. The bill would extend the benefit to fiscal year taxpayers who received PPP income in tax year 2019.

Unemployment tax information for 2022 released. Legislation that is effective 06/04/2021, provides for the unemployment insurance procedure to be applied by the secretary of the Louisiana Workforce Commission for calendar year 2022. Notwithstanding any other provision of present law, the administrator will apply Procedure 2 for calendar year 2022, for the maximum dollar amount of “wages”; maximum weekly benefit amount, with any applicable discounts; and the formula for computation of benefits. Procedure 2 provides the formula for calculating unemployment taxes and benefits, stipulating that the taxable wage base will be $7,700, and the maximum weekly benefit amount will be $247 when the state’s Unemployment Insurance Trust Fund balance range is between $750 million and $1.15 billion.

Wealth tax proposed for highest income bracket. On June 9, 2021, the Massachusetts legislature held a constitutional convention to set the proposal of a “wealth tax” on the November 2022 ballot. The proposed tax would set an additional 4% withholding tax rate on top of the state’s flat 5.05% for all income earned over $1 million. After the convention, voters will decide in a special referendum ballot whether or not the higher withholding rate will be imposed on this highest income bracket. The proposal was originally blocked as a citizen-led ballot initiative by the Massachusetts Supreme Court due to its inclusion of spending requirements for the potential accumulated tax revenue. The proposal was re-initiated by lawmakers and passed, bypassing the limitation posed by the secondary condition.

Guidance on withholding for work performed in a temporary location. The Missouri Department of Revenue has adopted Mo. Code Regs. Title 12 §10-2.019, which modifies the manner in which the amounts required to be withheld by certain employers for employees performing services for wages from a temporary work location are calculated during a defined period. For services performed by an employee after March 13, 2020, and prior to the earlier of the time at which an employer began withholding based on a time and attendance system for the employee or December 31, 2020, each employer may elect to withhold income tax from wages paid to an employee if such wages were earned from work performed at the employee’s primary work location, despite such employee working from a temporary work location during the coronavirus (COVID-19) relief period. The rule applies only to employers that did not maintain a time and attendance system for all employees on or before the declaration date, and only where such employer has a primary work location in Missouri with employees working from temporary work locations in states other than Missouri or has a primary work location in a state other than Missouri with employees working from temporary work locations in Missouri. The rule provides affidavit requirements, relevant definitions, and examples. The rule is effective 30 days after publication in the Code of State Regulations.

Employers will not be charged for unemployment benefits paid in second/third quarters of 2020. Recent legislation that takes effect on July 1, 2021, provides that unemployment benefits paid from April 1, 2020, to September 30, 2020, are not to be charged against an employer’s unemployment experience rating.

New law amends definition of wages. Legislation that is effective on July 1, 2021, provides that the term “wages” includes amounts owed to former employees who have been discharged or who quit and whose former employer fails to pay the employee by the statutory deadlines. The new law also provides that if an employee filing a complaint with the Nevada Labor Commissioner is covered by a collective bargaining agreement (CBA) that specifically provides the employee with remedies, the Labor Commissioner must decline jurisdiction of the claim until all of the remedies set forth in the CBA are exhausted. However, the Labor Commissioner may take jurisdiction if it is determined that the remedies in the CBA are inadequate, unavailable, or non-binding.

Employer blood donation credit enacted. New legislation enacts a new, non-refundable income tax credit to be claimed by an employer for each verified blood donation made by an employee as part of a blood drive that is organized by an Oklahoma non-profit blood donation organization in coordination with an employer or group of employers. The blood drive may not be open to non-employees. This credit is in effect for tax years 2022 through 2027. The credit is a $20 credit for each qualified donation. Total credits are capped at $500,000 per year.

Overtime wage law taking effect. On July 1, 2021, the Virginia Overtime Wage Act takes effect. This law requires employers in the state to pay an overtime wage rate of one and a half times the regular rate for all hours worked in excess of 40 hours in a workweek. Violations of this Act will be enforced by the Virginia Department of Labor and Industry. This law does not exempt small businesses from the Overtime Wage Act. Additionally, Virginia, its agencies, and localities are also subject to the Act. If an employee believes they are not being paid overtime wage rates beginning July 1, 2021 in violation of the law, they can file a claim for unpaid wages.

Worker classification guidelines clarified. The Virginia Department of Taxation (DOT) has released information on worker misclassification, which involves incorrectly identifying individuals as independent contractors instead of employees. Beginning January 1, 2021, Virginia adopted the IRS definition of worker misclassification, which assumes that an individual is an employee unless the business can prove an individual is an independent contractor pursuant to IRS guidelines. The IRS guidelines consider three categories when assessing a worker classification issue, which includes: behavioral control; financial control; and type of relationship. The DOT will begin audits with businesses and industries issuing 1099-NECs and 1099-MISCs to determine if the classification was appropriate. All instances of misclassification by the same employer within 72 hours will be considered a single offense.

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