Nicole Roberson UI Program Specialist Federal-State Unemployment Compensation (UC) Legislative Seminar COVERAGE AND FUTA PAYROLL TAX

Federal-State Unemployment Compensation (UC) Legislative Seminar Who is an Employee? Defined in section 3306(i), FUTA, by reference to section 3121(d), of the Internal Revenue Code (IRC) In general, “employees” are individuals who have employee status under usual common law rules.

20 Factor Test Behavioral – Is there a right to direct and control how the work is done? Financial – Who has the right to direct and control how the business activities of the worker’s activities are conducted? Relationship – How do the parties perceive their relationship to each other? Federal-State Unemployment Compensation (UC) Legislative Seminar

ABC Test

Federal-State Unemployment Compensation (UC) Legislative Seminar What is a Statutory Employee?

Federal-State Unemployment Compensation (UC) Legislative Seminar What is a Statutory Non-Employee?

Who Is An Employer? Most states use the Federal definition - quarterly wages of $1,500 paid in the calendar year, or preceding calendar year, or one worker in 20 different weeks. §3306(a)(1), FUTA Some states define “employer” as having any covered service in their employ. Some states have requirements of less than 20 weeks or less than $1,500 Federal-State Unemployment Compensation (UC) Legislative Seminar

What Are Wages & Employment? FUTA defines “wages” as “remuneration for employment.” §§3306(b)(1)-(19) contain exceptions to this definition. FUTA defines “employment” as services provided by an employee to a person who is doing the employing. §§3306(c)(1)-(21) contain exceptions to this definition. Federal-State Unemployment Compensation (UC) Legislative Seminar

Required Coverage Requires coverage of services performed for: State or local governments; Religious, charitable, educational, or other “501(c)(3)” nonprofit organizations; Federally-recognized Indian tribes. Federal-State Unemployment Compensation (UC) Legislative Seminar

Exceptions to Required Coverage Since FUTA is a remedial statute aimed at overcoming the evils of unemployment, it is to be liberally construed to effectuate its purposes, and exemptions to its requirements are to be narrowly construed. Coverage exclusions include: Any exclusion from coverage in section 3306(c)(1)-(6), FUTA or sections 3306(c)(9)-(21) Statutory non-employees Section 3309(b), FUTA, contains exclusions from required state coverage for nonprofit organizations, governmental entities, and Indian tribes; e.g., services performed by ministers, elected officials, members of the State National Guard or Air National Guard, and inmates of penal institutions; or Section 3309(c), FUTA, provides that nonprofit organizations must employ four or more individual for at least 20 days during the calendar year or preceding calendar year (with each day being in a different calendar week) in order for coverage to be required.

FUTA Payroll Tax & System of Credits The Federal Unemployment Tax Act (FUTA) establishes an excise tax on employers. FUTA and state unemployment taxes (SUTA) are complementary, but distinct and separate taxes. In general, FUTA taxes are for UI administration, extended benefits, & loans. SUTA taxes are for UI benefits. Federal-State Unemployment Compensation (UC) Legislative Seminar

Taxable Wages Wages subject to the tax are defined in section 3306(b), FUTA. The FUTA taxable wage base is the first $7,000 in wages paid to an individual during a calendar year. The vast majority of states have higher taxable wage bases.

Federal-State Unemployment Compensation (UC) Legislative Seminar

Normal Credit Reduces FUTA tax owed by an employer by the amount actually paid in SUTA taxes up to the equivalent of 5.4% on a $7,000 taxable wage base. Only available if state law is certified under §3304(a), FUTA. Employer must pay SUTA tax by due date of Federal return (Form 940) to receive full credit. Federal-State Unemployment Compensation (UC) Legislative Seminar

Additional Credit Reduces FUTA tax owed by an employer by the difference of the amount actually paid in SUTA taxes and the equivalent of 5.4% on a $7,000 taxable wage base. Only available if state law is certified for normal credit and under §3303, FUTA. Helps employers who pay reduced SUTA tax; otherwise there is no advantage to employers to stabilize workforce or participate in UI system. Federal-State Unemployment Compensation (UC) Legislative Seminar

Questions & Open Discussion Federal-State Unemployment Compensation (UC) Legislative Seminar