1. Payroll Accounting 2016 Bernard J. Bieg and Judith A. Toland
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2. UNEMPLOYMENT COMPENSATION TAXES
Chapter 5
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3. Learning Objectives
Describe the basic requirements for an individual to be an employer or an employee under Federal Unemployment Tax Act.
Identify generally what is defined as taxable wages by the Federal Unemployment Tax Act.
Compute the federal unemployment tax, the credit against the tax, and any credit reductions that might apply.
Describe how an experience-rating system is used in determining employers’ contributions to state unemployment compensation funds.
Complete the reports required by Federal Unemployment Tax Act.
Describe the types of information reports required under the various unemployment compensation laws.
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4. 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
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5. FUTA and SUTA (cont.) 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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6. 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!!
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7. Who is Covered Under FUTA (cont.)
Employees include
Part-time, temps and regular workers
Workers on vacation/sick leave
Agricultural employees (special rules)
Household employees
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8. 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)
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9. Employees Covered Under FUTA (cont.)
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 pages 5-3 and 5-4
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10. Who is Covered Under SUTA
Employees generally covered under SUTA if covered under FUTA
Likewise employers specifically excluded under federal law generally excluded under state laws
Many 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
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11. 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 residence
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12. Reciprocal Arrangements
If factors from prior slide do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be utilized
State 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 rate
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13. 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, pages and 5-13)
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14. Taxable Wages for FUTA/SUTA (cont.)
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
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15. Specifically Exempt Wages for FUTA
Advances or reimbursement of business expenses
Retirement pay
Educational assistance payments
Meals and lodging if for employer’s benefit
Strike benefits
Complete list on page 5-8
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16. FUTA Rates
FUTA rate = 6.0% of first $7,000 of gross wages for each employee per year
5.4% credit against FUTA (allowed for SUTA taxes)*
* Even if experience rating allows employer to pay a lower rate than 5.4%
6.0% less 5.4% credit = 0.6% net FUTA
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17. Credits Against FUTA Tax
To get full 5.4% SUTA credit, employer must have
Made SUTA contributions on timely basis - on or before due date for filing
Note: even if employer pays into more than one fund, credit still limited to 5.4%
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18. Credits Against FUTA Tax (cont.)
Been 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 (0.3% per year beginning the second year after the advance)
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19. SUTA Laws & Rates
Each employer’s rate based upon experience rating (see next slide)
New employer’s pay an initial contribution rate that applies for specific period of time
Some states utilize reserve-ratio formula to lower contributions based on low risk of unemployment
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20. SUTA Laws & Rates (cont.)
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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21. SUTA Rates
Experience rating reflects stability of employer’s employment history
Lower unemployment rate reflected in lower rate
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
Negative balance employers will experience higher tax rates
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22. SUTA Rates (cont.) Some states require employees to contribute to SUTA
Some states reduce rates if employers make voluntary contributions to state fund – this increases reserve account and thereby lowers future SUTA rate
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23. 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
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24. How to File Form 940 (cont.)
Can e-file after submit electronic IRS letter of application
When filing a corrected form, mark the “Amended” box and include explanation as to why an amended return is filed
A final return must be filed in year company ceases doing business
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25. FUTA Reporting Requirements
940 has multiple sections
Part Information about SUTA payments
Part 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 – 7 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
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26. FUTA Deposit Overview
Deposit quarterly - but only if cumulatively over $500
Required to deposit federal taxes electronically unless employer has $2,500 or less in quarterly tax liabilities
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27. FUTA Deposit Overview (cont.)
Due dates are as follows*
1/ / deposit by 4/30
4/ / deposit by 7/31
7/ / deposit by 10/31
10/1 - 12/ deposit by 1/31
*If falls on Saturday, Sunday or legal holiday, have until following business day
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28. 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
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29. How Much FUTA to Deposit (cont.)
Use voucher 940V
Penalties apply for failing to file 940 return, pay
FUTA taxes when due and/or make timely deposits
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30. 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
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31. SUTA Deposit & Reporting Overview (cont.)
SUTA quarterly contribution report generally shows the following
Each employee’s gross wages and taxable SUTA wages (wage information)
Contribution rate multiplied by taxable SUTA wages
Amount of required payment
Usually includes wage information report per employee
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32. 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 social security number are reported
Separation Reports
Informs state of separated employees - aids in determination of eligibility for benefits
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33. Additional SUTA Information Reports (cont.)
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 required
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