EMPLOYER QUALIFICATION AND SPECIAL CIRCUMSTANCES
Employee Classification
An employee is an individual that performs a service for the organization in the normal course of the business and receives value in exchange for that service. If these services are performed in Indiana, then you more than likely need to register and report their wages to the State of Indiana for Unemployment Tax. There are a few possible exceptions; Independent Contractors and Multi-State Employment being among them.
NOTE: Employment as defined for UI purposes is different than it is defined for IRS purposes, workers compensation, etc. If you have questions about a specific work relationship, please call (800) 891-6499 and select the employer option. |
See the section titled Special Types of Employment and Payment for a chart listing special types of employment and payments with their status regarding UI liability.
Independent Contractors
Employers may have questions regarding 1099 employees who they consider to be “Independent Contractors.” An employee can receive a 1099 and still be considered a covered worker.
Signing a contract where the worker agrees that they will be treated as an independent contractor and issuing the worker a 1099 instead of a W2 DOES NOT make the worker an independent contractor for unemployment purposes! |
Individuals will be considered independent contractors for the purposes of unemployment insurance ONLY IF ALL of the following apply:
- The individual is free from direction and control in connection with the performance of their service (The employer does not tell the individual when and where to work), AND
- The service is performed outside the usual course of business and the individual’s usual area of employment is not within the usual course of the business, (the individual is doing a job that is not part of normal business functions and the employee does not normally work for the business) AND
- The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the work they do for the organization; or is a sales agent who is paid on commission only and has complete control over their own time and effort. (The individual is doing work as their own boss, in the field they are doing work for the organization, or the individual works in sales, on commission, with freedom of when and how much to sell.)
Unless ALL of the above apply to the individual, that individual is an employee and their wages should be reported for unemployment tax purposes.
Unintentionally treating an employee as an independent contractor is called worker misclassification and can result in the employer being assessed additional contribution, interest, and penalties.
Multiple findings of worker misclassification can result in the employer being assessed with fraud penalties and / or civil penalties. Accountants and other advisors that assist or encourage employers to engage in worker misclassification can also be subject to civil penalties.
In extreme cases, employers can be subject to criminal prosecution for intentional worker misclassification.
Multi-State Employment
Employee wages are usually only reported to one state per year by their employer.
An exception to this would be the organization is an American employer with international locations and the worker performs no services within the United States.
If an employee:
- performs all duties in one state, or
- if any duties performed in other states are incidental to the work in the primary state, or
- if the duties performed outside of the primary state are temporary or transient in nature,
the employee’s wages are reportable to the state where they usually perform services.
Incidental Services:
Services are defined as “Incidental” when these out of state services are temporary, transient in nature, or when the employee is expected to return to the original state of employment at the end of the assignment. Incidental services are not considered multi-state employment.
EXAMPLE: The employee is part of a road construction team based in Michigan. The Michigan Company earned a contract to repair a section of a highway that is partially located in Michigan and partially located in Indiana. When the Michigan team works on the Indiana section of the highway, the work in Indiana is temporary or transient in relation to the work that they perform full time in Michigan, so the work is localized to Michigan. However, the Michigan team starts to run behind schedule, and they add a few workers to finish the repairs in Indiana. The additional workers are not going to work in Michigan for the company since they will not be needed once the project in Indiana is completed. These workers are reported to Indiana because they performed all their work in Indiana. The Michigan Company will have to register for an unemployment account in Indiana to report these workers localized to Indiana. |
Non-Incidental Services
When an employee performs services in more than one state, it is important for the employer to determine which state or states the employee’s wages must be reported. In accordance with IC 22-4-8-2(a) – (e) and the U.S. Department of Labor Unemployment Insurance Program Letter (UIPL) 20-04, the determination will be made by following the 3 tests:
Test 1: Report wages to the state from which the employee has a base of operations if some part of the work is performed in the same state as the base of operations. The base of operations can be a home office, corporate office, regional office, legal address of a sole proprietor, etc. In general, where the worker always starts and ends in the same location, this location is the base of operations. If there is no base of operations, or work is not performed in the same state as the base of operations, go to test 2.
Test 2: Report wages to the state from which the employee is directed and controlled if some part of the work is performed in the same state as the origin of the direction and control. This is the state from which basic authority or control emanates and should not be confused with the location from which an individual directly supervises the work performed under orders from the place of basic authority. If there is no work performed in the state where direction and control originate, go to test 3.
Test 3: Report wages to the state in which the employee resides if some part of the work is performed in the state of residence. If none of these tests apply, contact DWD at 800-891-6499, and select the employer option.
If you are still unsure, please review the following flowchart.
Unless the organization is an American employer with international locations and the worker performs no services within the United States, wages are only reported to a state where the worker performs some part of their services.
