CHAPTER 5 Payroll Accounting 2011 UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

FUTA and SUTA FUTA SUTA 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 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!

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!! Employees include Part-time, temps and regular workers Workers on vacation/sick leave Agricultural employees (special rules) Household employer

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) 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 page 5-4

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

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 (management, business records) Where are operations directed (state where control exists) Employee’s residence

Reciprocal Arrangements If factors from prior slide do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned Employer covers all worker’s services in one state, then all affected states must approve 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

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 on pages 5-12 – 5-14) 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 & 5-8

Specifically Exempt Wages for FUTA Advances or reimbursement of business expenses Retirement pay Educational assistance payments If part of nondiscriminatory plan Meals and lodging if for employer’s benefit Strike benefits Complete list on page 5-8

FUTA Rates FUTA rate = 6.2% of first $7,000 of gross wages for each employee per year 5.4% credit against FUTA (allowed for SUTA taxes)* Therefore gross 6.2% less 5.4% credit = .8% net FUTA *Even if experience rating allows ER to pay a lower rate than 5.4%

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 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 (.3% per year beginning the second year after the advance – for example, Michigan subject to additional rate if loans not repaid by 11/10/10)

SUTA Laws & Rates Each employer’s rate based upon experience rating (see next slide) Some states utilize reserve-ratio formula to lower contributions based on low risk of unemployment 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

SUTA Rates Experience rating reflects stability of ER’s employment history Also called merit rating Provides for reduction in SUTA rates 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 Some states require employees to contribute to SUTA Some states reduce rates if employers make voluntary contributions to state fund

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 Can e-file after submit electronic IRS letter of application A final return must be filed in year company ceases doing business

FUTA Reporting Requirements 940 has multiple sections Part 1 - Did company pay SUTA to one state? Part 2 – 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 – 8 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 File Schedule A to accompany 940 if multi-state ER or reduced credit

FUTA Deposit Overview Deposit quarterly - but only if cumulatively over $500 Due dates are as follows* 1/1 - 3/31 deposit by 4/30 4/1 - 6/30 deposit by 7/31 7/1 - 9/30 deposit by 10/31 10/1 - 12/31 deposit by 1/31 *If falls on Saturday, Sunday or legal holiday, have until following business day

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 Beginning in 2011 most required to make payments electronically

SUTA Deposit and Reporting Overview SUTA requirements vary widely by state In the states where EE also pays into SUTA, both EE and ER taxes deposited together SUTA quarterly contribution report generally shows the following Each employee’s gross wages and taxable SUTA wages (wage information) Contribution rate x taxable SUTA wages Amount of required payment Usually includes wage information report per employee

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 SS# are reported Separation Reports Informs state of separated employees - aids in determination of eligibility for benefits 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

Example 1 (5-1B page 5-43) During the year, Zeno company has a SUTA tax rate of 6.3%. The taxable payroll for the year for FUTA and SUTA is $77,000. Net FUTA tax…………. $77,000 X 0.008 = $ 616.00 Net SUTA tax…………. $77,000 X 0.063 = $ 4,851.00 Total unemployment taxes………………. $ 5,467.00

Example 2 (5-4B) Due to its experience rating, Ianelli, Inc is required to pay unemployment taxes on its payroll as follows: Under SUTA for Illinois on taxable payroll of $28,000 the contribution rate is 3.9% Under SUTA for Indiana on taxable payroll of $23,000 the contribution rate is 2.95% Under SUTA for Ohio on taxable payroll of $65,000 the contribution rate is 4.1% Under FUTA, the taxable payroll is $94,500. Compute: SUTA taxes paid to Illinois SUTA taxes paid to Indiana SUTA taxes paid to Ohio FUTA taxes paid

Example 5-4B (con’t) Under SUTA for Illinois on taxable payroll of $28,000 the contribution rate is 3.9% Under SUTA for Indiana on taxable payroll of $23,000 the contribution rate is 2.95% Under SUTA for Ohio on taxable payroll of $65,000 the contribution rate is 4.1% Under FUTA, the taxable payroll is $94,500. Compute: SUTA taxes paid to Illinois…. $ 28,000 X 0.039 = $ 1,092.00 SUTA taxes paid to Indiana…. $ 23,000 X 0.0295 = $ 678.50 SUTA taxes paid to Ohio……. $ 65,000 X 0.041 = $ 2,665.00 FUTA taxes paid……………. $ 94,500 X 0.008 = $ 756.00

Exercise 5-5B Cowen Company began its operations in August of the current year. During August and September, the company paid wages of $2,450. For the last quarter of the year, the taxable wages paid amounted to $3.900. None of the employees were paid more than $7,000 this year. Is Cowen Company liable for FUTA tax this year? If so, what is the net FUTA tax before any credit is granted for the SUTA tax? (a) Yes. Cowen Company meets the test of having paid wages totaling more than $1,500 during any calendar quarter of the current year. (b) Taxable wages $2,450 + $3,900 = $6,350.00 Net FUTA tax $6,350 × 0.008 = $ 50.80

Exercise 5-7B In April of the current year, Steelman Press Company transferred Ken Sherm from its factory in Louisiana to its plant in Florida. The company’s SUTA tax rates based on its experience ratings are 3.2% in Louisiana and 3.8% in Florida. Both states base the tax on the first $7,000 of each employees earnings. This year, Steelman Press Company paid Ken Sherm wages of $14,190; $4,950 were paid in Louisiana and the remainder in Florida Compute: Amount of SUTA tax the company must pay to Louisiana on Sherm’s wages. Amount of SUTA tax the company must pay to Florida on Sherm’s wages. Amount of the net FUTA tax on Sherm’s wages $4,950 × 0.032 = $158.40 $2,050 × 0.038 = $77.90 $7,000 × 0.008 = $56.00

Exercise 5-11B During 2011, Shoupe Company was subject to the Alaska state unemployment tax of 5.1%. The company’s taxable earnings for FUTA were $93,400 and the SUTA, $194,300. Compute: SUTA tax that Shoupe Company would pay to the state of Alaska Net FUTA tax for 2011 Amount of employee’ unemployment tax for 2011 (use the employee’s tax rate shown in Figure 5-1 in the text on page 5-12) $194,300 × 0.051 = $9,909.30 $ 93,400 × 0.008 = $747.20 $194,300 × 0.005 = $971.50

Don’t hesitate to email me at: dcummings@kaplan.edu Any Questions? Don’t hesitate to email me at: dcummings@kaplan.edu