1. Unemployment Insurance

2. What is FUTA? Federal Unemployment Tax Act
Employer paid tax (contributions)
Calculated as a percentage of covered wages for each employee
Cannot be withheld from employee’s wages
State unemployment could have employee contributions

3. Who must pay FUTA?
Nonfarm employers paying $1,500 or more in covered wages in any calendar quarter during the current or preceding calendar year
Nonfarm employers with at least 1 employee for at least part of 1 day in 20 different weeks, not necessarily consecutive, during the current or preceding calendar year
Farm employers paying $20,000 or more in covered wages in any calendar quarter during the current or preceding calendar year
Farm employers with at least 10 employees for at least part of 1 day in 20 different weeks, not necessarily consecutive, during the current or preceding calendar year
Employers paying domestic employees $1,000 or more in any calendar quarter during the current or preceding calendar year for work performed in a private home, local college club, fraternity, or sorority

4. What wages are FUTA exempt?
All employee compensation is subject to FUTA tax unless specifically exempted under the IRC
Most common exemptions:
Sick or disability payments
Workers’ compensation payments
NQDC payments
Noncash fringe benefits (e.g. GTL)
Qualified moving expense reimbursements
Wages paid to a beneficiary after the year of the employee’s death

5. FUTA Exempt Employments?
Most common:
Work performed for a federal, state, or local government employer
Wages classified as foreign source income (remember Section 14?)
Insurance agents who receive only commissions
Newspaper deliverers under age 18
Work performed by statutory nonemployees (remember Section 1?)

6. FUTA Tax Rate and Wage Base
Tax rate effective July 1, 2011: 6.0%
Wage Base: first $7,000 of employee’s covered wages in a calendar year
Eligible credit against FUTA tax rate when state unemployment taxes are paid in full and on time
Full eligible credit: 5.4%
Adjusted tax rate is 0.6%
FUTA tax applies only to wages when they are actually or constructively paid
Successor employers and common paymaster: same rules as social security limits

7. Depositing and Paying FUTA Tax
Taxable wages for quarter x .006 = quarterly FUTA liability
Deposit due dates
No deposit necessary when liability for quarter is $500 or less
Fourth quarter liability = total balance due, including amounts from previous quarters not deposited
Quarter Ending Date
Deposit Due Date
March 31
April 30
June 30
July 31
September 30
October 31
December 31
January 31

8. Calculating State Credits
90% or normal credit provides a reduction in FUTA liability for payments required and actually made under state unemployment compensation laws
Cannot exceed 5.4%
States must have ‘certified’ unemployment insurance programs
State-exempt employers do not have a credit
State must certify employer payments to the IRS
940 Certification Document
Watch out for the additional 2.7% add-on (state specific)

9. Reporting FUTA Tax
Annually reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Form 940 determines:
Employer’s FUTA taxable wages for the calendar year
FUTA tax liability on the taxable wages after accounting for the applicable state unemployment tax credits
FUTA tax deposits made during the year
Due date: January 31 of the year after the tax liability was incurred
February 10: Automatic extension if all quarterly tax payments were timely and paid in full

10. Form 940 – Part 1 and Part 2

11. Form 940 – Part 3 and Part 4

12. Form 940 – Part 5 and Part 6

13. Form 940 – Part 7

14. Penalties for Noncompliance
Late Filing
5% of the amount of tax required to be shown on the return, reduced by any timely deposits and credits
Maximum of 25% of the amount of tax, 15% per month up to a minimum of 75% of the tax required to be shown on the return if fraudulent
Failure to Pay
0.5% of any unpaid tax shown on the return, up to maximum of 25%
Additional 0.5% per month of any unpaid taxes not shown on the return but for which the IRS has issued a notice and demand, if the tax is not paid within 21 calendar days of the notice and demand, up to a maximum of 25%

15. Penalties for Noncompliance
Accuracy-related
20% of the understated amount that can be traced to the employer’s negligence
Can be imposed in addition to a penalty for filing a late return, but not in addition to a fraud penalty
Failure to make time deposits
2% of the undeposited amounts if paid within 5 days of the due date
5% of the undeposited amounts if paid within days of the due date
10% of the undeposited amounts if paid more than 15 days after the due date
15% of the undeposited amounts if not paid within 10 days after the employer receives the first IRS delinquency notice or on the same day a notice and demand for immediate payment is received

16. The Employment Relationship
Four factors used to determine to which state an employee should be allocated for unemployment insurance purposes
Are services localized?
Does the employee have a base of operations?
Is there a place of direction or control?
What is the employee’s state of residence?
Nearly all the states have reciprocal coverage agreements

17. SUI Taxable Wages
States use varied formulas for determining the experience rate
Reserve ratio (majority of states)
Benefit ratio method (2nd popular)
Benefit wage ratio method (Delaware and Oklahoma)
Payroll stabilization (Alaska only)
Be sure to watch employee transfers!
Has the SUI taxable wage base been met before the transfer?
What portion of the new state wage base is applicable?
New employer rates could apply for the first several years of operation
Three states have employee contributions (Alaska, New Jersey, Pennsylvania)

18. SUI Reporting Requirements
All states except Illinois require quarterly contribution and wage reports
Information required on reports
Total wages paid
Taxable wages paid
Nontaxable wages paid
Number of employees each month
Gross wages for each employee
Taxable / nontaxable wages breakdown for each employee
Number of weeks worked by each employee

19. Multiple Worksite Reporting
States are responsible for collecting employment data and providing it to the Bureau of Labor Statistics (BLS)
Mandated employer reporting
Uses one UI account number in that state for all employees
Has more than one worksite in the state
Has a total of at least 10 employees in the secondary worksites
Filed monthly and quarterly
Balances against SUI wage reports

20. State Disability Insurance (SDI)
5 states plus Puerto Rico provide benefits to employees through a tax-supported state fund CA, HI, NJ, NY, RI
Funds operate the same way as state unemployment insurance programs
Funding for program could be employee only or employee and employer contributions
Weekly or annual wage bases depending on the state

21. DO YOU KNOW???
What is the normal credit an employer can take against the FUTA tax liability?
What is the FUTA wage base?
What is the FUTA tax rate?
What is the due date for Form 940?