Unemployment Insurance

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

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

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

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?)

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

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

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)

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

Form 940 – Part 1 and Part 2

Form 940 – Part 3 and Part 4

Form 940 – Part 5 and Part 6

Form 940 – Part 7

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%

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 6 - 15 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

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

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)

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

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

State Disability Insurance (SDI) 5 states plus Puerto Rico provide benefits to employees through a tax-supported state fund 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

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?