Presentation on theme: "Unemployment Compensation Taxes Chapter 5 Unit 6 Seminar."— Presentation transcript:
Unemployment Compensation Taxes Chapter 5 Unit 6 Seminar
Social Security Act The Social Security Act of 1935 ordered every state to set up an unemployment compensation program in order to provide payments to workers during periods of temporary unemployment. Payroll taxes at both the federal and state levels fund this unemployment insurance program.
Social Security Act The Federal Unemployment Tax Act (FUTA) imposes a tax on employers based on wages for covered employment. It is not used collected or deducted from employees’ wages. The funds collected by the federal government as a result of this tax pay the cost of administering both the federal and the state unemployment insurance programs. The FUTA tax is not used for the payment of weekly benefits to unemployed workers. Such benefits are paid by the states in accordance with each state’s unemployment tax law (SUTA)
Employers - FUTA The federal law levies a payroll tax on employers for the purpose of providing more uniform administration of the various state unemployment compensation laws. The federal law considers a person or a business an employer if either of the following two tests applies: 1. Pays wages of $1,500 or more during any calendar quarter in the current or preceding calendar year, or 2. Employs one or more persons, on at least some portion of one day, in each of 20 or more calendar weeks during the current or preceding taxable year.
Employers - FUTA A number of points serve to clarify the meaning of the two alternative tests: –A calendar week is defined as seven successive days beginning with Sunday –The 20 weeks need not be consecutive –The employees need not be the same employees –Regular, part-time, and temporary workers are considered employees –In determining the employer’s status, employees include individuals on vacation or sick leave –Members of a partnership are not considered to be employees
Employers - FUTA Other covered employers: 1. Agricultural employers – who in the present or previous year paid $20,000 or more to farm workers in any calendar quarter and/or employed 10 or more farm workers during some part of a day during any 20 different weeks. 2. Household employers – who during the present or previous year paid $1,000 or more during any quarter for household services in a private home, college club, or local fraternity or sorority club.
Employers - FUTA Once attained, the employer status continues until the employer fails to meet the test for coverage during a year. In this case, liability under FUTA would end as of January 1 of the next year.
Employers - SUTA In general, employers specifically excluded under the federal law are also excluded under the state laws. As a result of variations found in state unemployment compensation laws, not all employers covered by the unemployment compensation laws of one or more states are covered by FUTA. For example, the services performed by some charitable organizations may be covered by a state’s unemployment compensation act, but the same services may be exempt from FUTA coverage.
Employees - FUTA Every individual is considered an employee if the relationship between the worker and the person for whom the services are performed is the legal common-law relationship of employer and employee. The individual would then be counted in determining whether the employer is subject to FUTA.
Employees - FUTA For the purpose of the FUTA tax, the term “employee” also means any of the following who perform service for remuneration: –An agent-driver or a commission-driver who distributes food or beverages (other than milk) or laundry or dry-cleaning services for the principal. –A traveling or a city salesperson engaged in full-time soliciting and transmitting to the principal orders for merchandise for resale or supplies for use in business operations.
Employees - FUTA Home workers and full-time life insurance agents are exempt under FUTA. If a person in one of these categories has substantial investment in facilities used to perform the services (not including transportation facilities), the individual is an independent contractor and not a covered employee.
Employees - FUTA The work performed by the employee for the employer includes any services of whatever nature performed within the United States, regardless of citizenship or residence of either. An employee may perform both included and excluded employment for the same employer during a pay period. In such case, the services that predominate in the pay period determine the employee’s status with that employer for the period.
Employees - FUTA Among those excluded from coverage in 2009 are: –Casual laborers –Directors of corporations –Foreign students or exchange visitors –Government employees if international organizations –Independent contractors –Individuals under 18 years of age who deliver or distribute newspapers or shopping news –Insurance Agents or solicitors paid solely on commission basis –Members of partnership –Service performed by an individual for a son, daughter, or spouse, or by a child under 21 for a parent –Services performed by employee representatives for employers covered by either the Railroad Retirement Tax Act or the Railroad Unemployment Insurance Act –Services performed by individuals in fishing and related activities –Services performed in the employ of a religious, educational, or charitable organization that is exempt from federal income tax –Services performed in the employ or foreign, federal, state, or local governments and certain of their instrumentalities –Students enrolled full-time in a work-study or internship program –Student nurses and hospital interns
Employees - SUTA The definition of “employee” as established by FUTA applies to a majority of the states, although minor variations exist in the state laws. All of the following requirements must be met for exclusion: –Free from control or direction –Performed outside usual course of business –Customarily engaged in an independent trade or business
Coverage of Interstate Employees An interstate employee is an individual who works in more than one state. To prevent duplicate contributions on the services of interstate employees, all states have adopted a uniform four-part definition of employment to determine which state will cover such employees. Several factors that must be considered in determining coverage of interstate employees, in their order of application, include –Place where the work is localized –Location of base of operations –Location of place from which operations are directed or controlled –Location of employee’s residence
Place Where Work is Localized Under this main criterion of coverage adopted by the states, if all the work is performed within one state, it is clearly “localized” in the state and continues “employment” under the law of that state. In some cases part of the person’s work may be performed outside the state and the entire work may be treated as localized within the state if the services performed in other states are temporary or transitory in nature.
Location of Base of Operations Often a worker may services continually in two or more states. In this situation the employment in one state is not incidental to the employment in the other state. Therefore, the test of localization does not apply, and the base of operations test must be considered. Under the base of operations test, the employee’s services may be covered by the laws of a single state even thought the services are not localized within that state. The base of operation is the place of a more or less permanent nature from which the employee starts work and to which the employee customarily returns.
Location of Place from Which Operations are Directed or Controlled Sometimes an employee’s services are not localized in any state or it may be impossible to determine any base of operations. If the place of control can be fixed in a particular state in which some service is performed, that will be the state in which the individual is covered.
Location of Employee’s Residence If an employee’s coverage cannot be determined by any of the three tests described, a final test, that of the employee’s residence, is used. Thus, the worker’s service is covered in its entirety in the state in which the employee lives, provided some of the service is performed in that state.
Reciprocal Arrangements and Transfers of Employment If coverage of interstate employees cannot be determined using these factors, states may enter into arrangements under which the employer may elect coverage of the employee in one state. These arrangements, known as reciprocal arrangements, provide unemployment insurance coverage and payment of benefits to interstate workers.
Coverage of Americans Working Overseas Coverage extends to US citizens working abroad for American employers. The state of the employer’s principal place of business would provide the coverage. If the principal place of business cannot be determined, the state of incorporation of the state of residence of the individual owner would be the state of coverage.
Wages - FUTA Generally, wages means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash, with certain exceptions. During 2009, taxable wages include only the first $7,000 of remuneration paid by an employer to an employee with respect to employment during any calendar year. It may be paid on a piece-work basis or it may be a percentage of profits; it may be paid hourly, daily, weekly, biweekly, semimonthly, or annually.
Taxable Wages for Unemployment Purposes Some of the more common types of payments made to employees and the taxability status of these payments include the following: –Advance payment for work to be done in the future –Bonuses as remuneration for services –Cash and noncash prizes and awards –Christmas gifts –Commissions as compensation for covered employment –Contributions by an employer to a supplemental unemployment individual-account plan –Dismissal payments –Employer contributions to cash or deferred arrangements to the extent that the contributions are not included in the employee’s gross income –Idle time and standby payments –Payment by the employer of the employee’s FICA tax or the employee’s share of any state unemployment compensation tax without deduction of the employee’s wages –Payments representing compensation for services by an employee paid to the dependents after an employee’s death. –Payments to employees or their dependents on account of sickness or accidental disability –Payment under a guaranteed annual wage plan –Retroactive wage increases –Tips –Transfer of stock by employer to employee as remuneration for services –Vacation pay
Nontaxable Wages for Unemployment Purposes –Advances or reimbursement of ordinary and necessary business expenses –Allowances made to an individual by a prospective employer for expenses incurred –Bonuses under a supplemental compensation plan paid upon retirement, death, or disability –Caddy fees –Commissions paid –Courtesy discounts to employees and their families –Educational assistance payments –Payments made by employer under a plan established by the employer for health, accident, or life insurance, or retirement benefits –Reimbursement of employee’s moving expenses –Retirement pay –Strike benefits paid by a union to its members –Value of meals and lodging furnished employees for convenience of employer –Worker’s compensation payments
Wages - SUTA The definition of taxable wages is fairly uniform under the various state unemployment compensation laws. However, some variations exist among the states as to the status of particular kinds of payments. For example, about one-sixth of the states have ruled that Christmas bonuses or gifts are “wages” when substantial, contractual, or based on a percentage of the employee’s wages or length of service. A further variation in defining taxable wages among the states arises in the treatment of dismissal payments. Generally, such payments are considered wages whether or not the employer must legally make the payments.
Unemployment Compensation Taxes and Credits The base of the unemployment compensation tax is wages paid rather than wages payable, therefore, an employer is liable for the unemployment compensation tax in the year in which wages are paid to employees, not necessarily in the year in which the services are rendered.
Unemployment Compensation Taxes and Credits If an employee performs services in 2008 but is not paid for them until 2009, the employer is liable for the tax in 2009, and the 2009 tax rates apply. Wages are considered paid when actually paid or when constructively paid. Wages are constructively paid when credited to the account of, or set apart for, an employee so that they may be drawn at any time, even though they are not actually possessed by the employee.
Tax Rate - FUTA Under FUTA, all employers are subject to a tax with respect to having individuals in their employ. For 2009, the employer’s tax rate is 6.2% of the first $7,000 wages paid each employee during the calendar year. An employer is liable for FUTA tax on wages paid each employee until the employee’s wages reach the $7,000 level. If an employee has more than one employer during the current year, the taxable wage base applies separately to each of those employers, unless one employer has transferred the business to the second.
Credits Against FUTA Tax The actual FUTA tax paid is usually only 0.8 percent, since employers are entitled to a credit against their FUTA tax liability for contributions made under approved state unemployment compensation laws. The maximum credit permitted is 5.4% (90% of 6%). If the FUTA tax rate is 6.2%, the net FUTA rate will be 0.8% if the full 5.4% credit applied. In order to obtain the maximum credit of 5.4% against the federal tax, the employer must make the state contributions on or before the due date for filing the annual return under FUTA – February 1, 2010. If the employer is late in paying the state contributions, the credit is limited to 90% of the amount of the deposit that would have been allowed as a credit if the late contributions had been paid on time.
Experience Rating In some cases, employers may pay contributions into their state unemployment fund at a rate lower than 5.4%. The method by which the employer contributions may be adjusted because of favorable employment record is referred to as experience rating or merit rating. If an employer receives an additional credit against the FUTA tax because the state experience rate is less than 5.4%, the additional credit is not subject to the 90% FUTA credit limitation for late SUTA payments. Example on page 5-11
Tax Rates - SUTA Figure 5-1 on page 5-12 presents a summary of each state’s 2008 unemployment compensation laws, including the tax rates and the wage limitations. The tax rate applied to each employer within a particular state yields the funds used by that state in paying benefits to its unemployed workers. Some states, as shown in figure 5-1, impose a contributions requirements on employees in addition to the contributions made by the employer.
Unemployment Compensation Reports Required of Employer Annual FUTA Return – Form 940: the prescribed form for making the return required of employers in reporting the tax imposed under FUTA. Figure 5-2 on page 5-20. The employer must file the annual return no later than January 31 following the close of the calendar year.