Tammy Byrd, CPP March 19 th, 2016 UNEMPLOYMENT INSURANCE Federal and State Joint System

What is Unemployment Insurance? Program that is funded by Employer Contributions on both the Federal and State levels to provide income for terminated employees while they are trying to secure another job.

FUTA Federal Unemployment Tax Act Employer contributions in the form of unemployment taxes calculated as a percentage of covered wages for each employee. FUTA cannot be withheld from an employees’ wages. How Much Does an Employer Pay? Since July 1, 2011 employers have paid FUTA tax at the rate of 6.0% of the first $7,000 of each employee’s covered wages in a calendar year. Constructive payment rules apply. (Not necessarily when earned, but when paid.)

FUTA Federal Unemployment Tax Act continued… Most employers do not pay the full 6.0%. A credit up to 5.4% reducing the rate to 0.6% may be applicable. Who Qualifies for the Credit? Employers that pay their State Unemployment Taxes in full AND on time.

FUTA Federal Unemployment Tax Act continued… Who Must Pay FUTA Tax? Employers that meet one of the following criteria must pay federal unemployment tax: Nonfarm employers paying $1,500 or more in covered wages in any calendar quarter during the current or preceding calendar year. Nonfarm employers employing at least one employee for at least part of one 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 employing at least 10 employees for at least part of one 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.

FUTA Federal Unemployment Tax Act continued… Some employers meeting the criteria are NOT subject to FUTA Tax Federal, State and Local Government Employers Including their political subdivisions and Indian Tribes Nonprofit Religious, Charitable or Tax Exempt Educational Organizations

What wages are EXEMPT from FUTA Tax? FUTA Federal Unemployment Tax Act continued… In general, ALL employee compensation is subject UNLESS specifically exempted under the IRC. Here are some examples: Sick or disability benefits paid more than 6 calendar months AFTER the last month the employee worked for the employer. Sickness or injury payments made under a state workers’ compensation law or a law in the nature of workers’ compensation law. Payments made under a deferred compensation plan, except elective deferrals to the plan. Payments made under a §125 flexible benefits plan (i.e., cafeteria plan), other than elective deferrals to a deferred compensation plan and payments made under an adoption assistance plan. Noncash payments to an employee for work done outside the employer’s trade or business. Qualified moving expense reimbursements. Death or disability retirement benefits.

Depositing and Paying FUTA Tax Amount Due Employers determine their liability on a Quarterly basis assuming at least for the first 3 quarters they are entitled to the full 5.4% credit. Therefore employers calculate their FUTA Liability by multiplying the FUTA Taxable Wages by 0.6%. Due Dates (Last Day of the month following Qtr End*) 1 st Qtr Ending 3/31 Due 4/30 2 nd Qtr Ending 6/30 Due 7/31 3 rd Qtr Ending 9/30 Due 10/31 4 th Qtr Ending 12/31 Due 1/31 *Extra Day for Weekends and Holiday (If the tax deposit due date falls on a weekend or Federal Legal Holiday, due next business day) Special Rule: For amounts $500 or less, no deposit is due. The liability is carried forward and added to the ER’s Liability for the next quarter. ER’s determine 4 th Qtr Liability by completing Form 940 due Annually

Question Throughout the year, what percentage of the FUTA Taxable wages does the Employer pay? 0.6% Quarters 1-3 the ER assumes they are eligible for the full 5.4% credit

True or False Farm employers employing at least one employee for at least part of one day in 20 different weeks (not necessarily consecutive) during the current or preceding calendar year must pay FUTA tax on their applicable wages? False Farm Employers with 10 or more employees with the condition above are required to pay the FUTA tax. Non-Farm employers follow the condition above.

Calculating State Credits Against FUTA Tax Liability Normal Credit The normal credit against FUTA tax liability equals the amount of an employer’s required contributions paid timely into a certified state UI fund. It is also called the 90% credit because the amount of the credit is limited to 90% of the 6% FUTA Tax Rate.

“Normal” or “90%” Credit Payment must be made by Form 940 due date −Due Date is February 10 th if ER has timely deposited all FUTA tax liability; otherwise Due Date is January 31 st −If an extension for filing Form 940 is granted, the ER can still receive full credit for state payments made by the extended filing date. State UI taxes paid after the filing deadline are limited to 90% of the payments. Full credit is allowed for payments made before the filing due date. NO credit is allowed for state payments made after the Form 940 is filed. If an ER makes a timely payment but sends to the wrong state by mistake, it can still receive the full credit.

State Contributions UI payments must be paid by the Employer 3 states require EE’s to make UI contributions which are Alaska, New Jersey and Pennsylvania. EE Contributions may not be taken as a credit against the ER’s FUTA liability; however if the ER voluntarily pays the EE’s share of State UI, the ER will receive normal credit for those payments.

Outstanding State Loan Credit Reduction States with a high rate of Unemployment and difficulty meeting their benefit obligations can borrow money from the FUA (Federal Unemployment Account) to pay benefits. If the loan is not repaid by the end of the following year (Nov 10 th ) the FUTA credits for employers in those states are reduced. Each year of unpaid loan balance reduces the credit by 0.3% therefore increasing the FUTA tax rate to 0.9% (0.6%+0.3%).

Question FUTA requires that each state’s taxable wage base be at least equal to the FUTA taxable wage base which is? $7,000 The state taxable wage base can be higher; however it cannot be lower than the federal taxable wage base.

Federal Form 940 ER’s covered by FUTA must report their liability annually on Form 940. If a business is sold, only the wages paid by that employer should be reported. If companies merge or consolidate, the entity that results is the ER that must report the wages paid by all corporations involved. Form 940 must be signed by one of the following: −Individual owning the business if sole proprietorship −President, VP or other principal corporate office authorized to act is Corporation (including LLC if treated as a Corporation.) −Owner or Principal officer authorized to act, if it is a single member LLC treated as a disregarded entity. −An authorized member, partner or officer of an unincorporated organization or partnership (including a LLC treated like a partnership) having knowledge of the organization’s affairs. −A fiduciary if the ER is a trust or estate

Federal Form 940 Cont… Due Date −January 31 st Automatic Extension to February 10 th −ER’s that deposit their FUTA tax liability in full and on time for all 4 quarters. −Extension does not apply to the deposit ER’s that go out of business −The due dates above apply −Box D in the upper right hand corner of page 1 must be checked. −Statement must be attached including the following: Location where required records will be kept Responsible party for keeping records Name and address of purchaser or the fact that there was no purchaser or purchaser’s name is unknown

FUTA Penalties Late filing of Form 940 (Unless an ER has reasonable cause and is not guilty of willful neglect, late filing of Form 940 results in an “addition to tax”. −5% of the amount of tax required to be shown on the return (reduced by any timely deposits and credits) for each month or fraction of a month the return is late. −25% maximum −Fraudulent filing is 15% per month up to a maximum of 75%

FUTA Penalties cont… Failure to pay FUTA tax (Unless an ER has reasonable cause and is not guilty of willful neglect, late payment of tax owed as shown on Form 940 results in an “addition to tax”. −0.5% of any unpaid tax shown on the return (after accounting for credits) for each month or fraction of a month the payment is late up to a maximum of 25%. −Additional 0.5% of any unpaid tax 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 (10 business days if the amount is at least $100k) up to a maximum of 25%. −Doubled to 1% per month or fraction of month for amounts remaining unpaid after 10 days after the ER receives a notice of intent to levy from the IRS or 1 day after the day the ER receives a notice and demand for immediate payment from the IRS.

FUTA Penalties cont… Failure to File and Pay −In any month where an ER is subject to additions to tax both for a failure to file Form 940 and a failure to pay FUTA tax, the addition for failure to file is reduced by 0.5% of the unpaid tax. Failure to make timely FUTA deposits −2% of the undeposited amount if it is paid within 5 days of the due date −5% of the undeposited amount if it is paid within 6-15 days of the due date −10% of the undeposited amount if it is paid more than15 days of the due date −15% of the undeposited amount if not paid within10 days after the ER receives its first IRS delinquency notice or on the same day a notice and demand for immediate payment is received. −10% penalty for depositing FUTA tax more than 15 days after the due date also applies to ER’s that do not pay electronically through EFTPS.

State Unemployment Insurance Employee’s working in multiple states Although FUTA provides a framework for state funding and coverage, each state has their own method for determining tax rates, wage bases and benefit eligibility and amounts. −ER’s that have EE’s working in more than one state must determine which state the EE should be “allocated” to for UI purposes by using 4 factors: Are services “localized”? Does the EE have a “base of operations”? Is there a “place of direction or control”? What is the EE’s “state of residence”? Reciprocal coverage arrangements may apply

SUI Taxable Wages ER’s must check state laws and rules in the states where they have EE’s to determine whether the payments are taxable. Most states follow the FUTA taxable rule; however several states differ.

State Contribution Rates and Experience Rating The contribution rate is the rate an ER applies to its taxable payroll for each EE to determine the amount of UI taxes to pay. The rate is determined by the ER’s experience rating which is based on the ER’s unemployment benefit charges and average annual taxable payroll. States use one of 4 methods to determine an ER’s experience rate: Reserve Ratio (Used by majority of states) Benefit Ratio (2 nd most used) Benefit Wage Ratio (Only Delaware and Oklahoma) Payroll Stabilization (Only Alaska)

Reserve Ratio Method Reserve ratio is used by a majority of states. Unemployment Taxes Paid - Benefits Charged Average taxable payroll = (Reserve Ratio) The Reserve Ratio calculated above determines the ER’s UI rate according to tables issued by the state. The higher the ratio, the lower the tax rate.

Benefit Ratio Method Benefit ratio is the next most popular method used Benefits Charged Total taxable payroll =(Benefit Ratio) The Benefit Ratio calculated above determines the ER’s UI rate referencing tables issued by the state. The lower the ratio, the lower the tax rate.

Benefit Wage Ratio Method Benefit wage ratio is only used by 2 states Benefits Wages Paid Total taxable payroll =(Benefit Wage Ratio) The Benefit Wage Ratio calculated above determines the ER’s UI rate relating the ratio to a state “experience factor” and then referring to tables issued by the state. The lower the ratio, the lower the tax rate.

Payroll Stabilization Method Payroll Stabilization Method is only used by 1 state (Alaska) The Payroll Stabilization Method determines the ER’s UI rate by fluctuations in its payroll from quarter to quarter and year to year. If more employees are terminated and the payroll decreases, the ER’s tax rate increases. If ER’s payroll remains stable or increases, its tax rate will not be increased and may be decreased.

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