CHAPTER 5CHAPTER 5
UNEMPLOYMENTUNEMPLOYMENT COMPENSATION TAXESCOMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS
Payroll Accounting 2012Payroll Accounting 2012Bernard J. Bieg and Judith A. TolandBernard J. Bieg and Judith A. Toland
Learning Objectives
Describe basic requirements for classification under Federal Unemployment Tax Act (FUTA)
Define taxable wages under FUTA Compute FUTA and credit against it Describe how experience-rating system is
used in determining state unemployment compensation (SUTA) funds
Complete reports required by FUTA Describe types of information reports
required under SUTA
FUTA and SUTA FUTA
Federal Unemployment Tax Act Passed as part of Social Security Act of 1935 Federal law that imposes an employer tax Required for administration of federal and state
unemployment insurance programs
SUTA State Unemployment Tax Act
Different law in each state Funds used to pay benefits and administer program at
individual state’s level
In current economic situation, unemployment
insurance programs are being stretched very thin!
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Who is Covered Under FUTA Employers are liable for this tax if
Pay $1,500 or more of wages in any quarter in current or prior year
Employ one or more persons, on one day in each of 20 weeks in current or prior year
Special rules for agricultural and household employers
If employer owes FUTA – liable for entire year!!
Employees include Part-time, temps and regular workers Workers on vacation/sick leave Agricultural employees (special rules) Household employees
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Employees Covered Under FUTA
General rule is everyone is considered an EE if common-law relationship exists Also specifically includes
Drivers who distribute food/beverage or deliver laundry
Traveling salespeople (certain situations) Specific exceptions include
Partners Directors Independent contractors Home workers Full-time life insurance salespeople Children under 21 working for parents RRTA or governmental employees Complete list on page 5-4 LO-1
Who is Covered Under SUTA
Employees generally covered under SUTA if covered under FUTALikewise employers specifically excluded under
federal law generally excluded under state lawsMany states apply “ABC” test for SUTA
exclusion (meaning all of following tests must be met): Is the worker free from control/direction Is work performed outside usual course of
business Is person customarily engaged in an
independent trade or business LO-1
Interstate Employees and SUTA
With multi-state employees, sometimes a question arises as to which state employer is liable for SUTA (to decide - apply following in order) Where is work localized (meaning where is
work primarily performed) This is most compelling criterion - most states
assign coverage if work is primarily performed within that state
Where is operational base located (management, business records)
Where are operations directed (state where control exists)
Employee’s residenceLO-1
Reciprocal Arrangements
If factors from prior slide do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be utilizedState may enter into arrangements under
which employer may elect coverage of the employee in one state
Benefit to employer as he/she can chose state in which all services of interstate workers are to be covered Based on most advantageous wage base and
contribution rateLO-1
Taxable Wages for FUTA/SUTA
Taxable FUTA wage base caps at $7,000/year* Taxable SUTA wage base caps at different amount
in each state (Figure 5-1 on pages 5-102 through 5-14)
Wages include Bonuses, advances, severance pay Stock compensation - fair market value Tips Retroactive wage increases Complete list of taxable wages found on pages 5-7 and
5-8
*Discussion as to new wage base and rate
being discussed as of print time
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Specifically Exempt Wages for FUTA
Advances or reimbursement of business expenses
Retirement pay Educational assistance payments
If part of nondiscriminatory plan Meals and lodging if for employer’s benefit Strike benefits Complete list on page 5-8
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FUTA Rates
FUTA rate = 6.2% of first $7,000 of gross wages for each employee per year
5.4% credit against FUTA (allowed for SUTA taxes)*
Therefore gross 6.2%
less 5.4% credit
= .8% net FUTA
*Even if experience rating allows employer to pay a lower rate than 5.4%
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Credits Against FUTA Tax
To get full 5.4% SUTA credit, employer must haveMade SUTA contributions on timely basis -
on or before due date for filingBeen located in a state that is not in
default on their Title XII advances Title XII of the Social Security Act lends funds to
states so they may provide unemployment compensation funds from federal government
Credit is reduced (.3% per year beginning the second year after the advance – for example, Michigan subject to additional rate if loans not repaid by 11/10/11) LO-3
SUTA Laws & Rates Each employer’s rate based upon
experience rating (see next slide) Some states utilize reserve-ratio formula
to lower contributions based on low risk of unemployment
Nonprofits have option to reimburse state for actual amount of unemployment benefits paid instead of paying percentage
SUTA Dumping Prevention Act mandates that states enact laws to stop businesses from lowering their unemployment rates through creating new entities
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SUTA Rates
Experience rating reflects stability of employer’s employment history Also called merit rating Provides for reduction in SUTA rates Most common formula is reserve-ratio formula Positive balance employers will experience lower
tax rate – this means employer has built up a balance in reserve
Some states require employees to contribute to SUTA
Some states reduce rates if employers make voluntary contributions to state fund
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How to File Form 940
Form 940 due by January 31 of next year Or if timely deposits have been made, have
until February 10 to file Need to attach Schedule A (Form 940) if
multi-state employer or have SUTA credit reduced
Filed with IRS District Center in which business is located – thereafter IRS will send preaddressed Form 940
Can e-file after submit electronic IRS letter of application
A final return must be filed in year company ceases doing business
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FUTA Reporting Requirements940 has multiple sections
Part 1 - Did company pay SUTA to one state? Part 2 – Calculate FUTA tax before adjustments Part 3 – Determine adjustments Part 4 – Compare adjusted FUTA tax to deposits and
calculated balance due or overpayment
Part 5 – Report FUTA liability Parts 6 – 8 Delineate 3rd party designee, paid preparer and
sign*
*Individual may sign if sole proprietorship Principal officer may sign if corporation Duly authorized member may sign if partnership Fiduciary may sign if trust or estate
File Schedule A to accompany 940 if multi-state ER or reduced credit
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FUTA Deposit Overview
Deposit quarterly - but only if cumulatively over $500
Due dates are as follows* 1/1 - 3/31 deposit by 4/30
4/1 - 6/30 deposit by 7/31
7/1 - 9/30 deposit by 10/31
10/1 - 12/31 deposit by 1/31
*If falls on Saturday, Sunday or legal holiday, have until following business day
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How Much FUTA to Deposit
If $500 or more, must deposit by last day of month following close of quarter
If less, can wait and add to next quarter, then if it’s $500 or more, must deposit
If never gets over $500, pay with Form 940 at year-end
Use voucher 940-V
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SUTA Deposit & Reporting Overview
SUTA requirements vary widely by state In the states where EE also pays into SUTA,
both EE and ER taxes deposited together SUTA quarterly contribution report
generally shows the following Each employee’s gross wages and taxable SUTA
wages (wage information) Contribution rate x taxable SUTA wages Amount of required payment Usually includes wage information report per
employeeLO-6
Additional SUTA Information Reports Forms vary by state but may include
Status Reports Initial registration with state as employer liable for SUTA
Wage Information Report Earnings per employee and SS# are reported
Separation Reports Informs state of separated employees - aids in
determination of eligibility for benefits Partial Unemployment Notices
Notifies state and the employees who have had their hours cut back to part-time of potential eligibility for partial unemployment benefits
In an increasing number of states, electronic filing of
reports and payment of tax are requiredLO-6
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