Payroll Accounting 2005 Bernard J. Bieg CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

FUTA and SUTA FUTA SUTA Federal Unemployment Tax Act Employer tax required for administration of federal and state unemployment insurance programs SUTA State Unemployment Tax Acts Different for each state Funds used to pay benefits and administer program at individual state’s level

**Then liable for FUTA for entire year** Who Pays FUTA FUTA passed to comply with SSA of 1935 Employers are liable for this tax if Pay $1,500 of wages in any quarter in current or prior year Employ one or more persons, in one day in each of 20 weeks in current or prior year **Then liable for FUTA for entire year** Employees include part time, temps and regular workers workers on vacation/sick leave

Services Covered under FUTA General rule is everyone is considered an EE if common-law relationships exists (with specific exceptions as follows) Partners Directors Independent contractors Children under 21 working for parents RRTA or governmental employees Nonprofits (church, educational, etc.) Complete list on page 5-6

SUTA and Interstate EE Generally covered under SUTA if covered under FUTA Multi-state employees: issue is to which state does ER pay SUTA to (apply following in order) where is work localized (work primarily performed) where is operational base (management, business records) where are operations directed (state where control exists) employee’s residence If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned (in most states) Americans working overseas for American company are covered

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 (pp 5.13 - 5.15) Wages include: bonuses, advances, severance pay stock compensation (FMV) tips complete list (pp 5.8 - 5.9)

Specifically Exempt Wages for FUTA Worker’s compensation payments Retirement pay Educational assistance payments if part of nondiscriminatory plan Meals and lodging, if for ER’s benefit Strike benefits Complete list on page 5.9

Therefore gross = 6.2% - 5.4% credit = .8% net FUTA Rates FUTA = 6.2% of first $7,000 of gross wages for each employee per year 5.4% credit against FUTA made for SUTA Therefore gross = 6.2% - 5.4% credit = .8% net To get 5.4% credit must have: Made SUTA contributions on timely basis Been located in a state that is not in default on their Title XII advances (credit is reduced .3% per year beginning the second year after the advance) Title XII is the act that allows states to borrow unemployment compensation funds from federal government

FUTA Deposit and Reporting Overview Deposit quarterly (but only if cumulatively over $100) 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* File annually Form 940 due by 1/31 of following year *If falls on Saturday, Sunday or legal holiday, have until following business day

How Much FUTA to Deposit If $100 or more, must deposit If less, can wait and add to next quarter, then if it’s $100 or more, must deposit If never gets over $100, pay with Form 940 or 940-EZ at year end Use Form 8109 coupon and deposit with an authorized depository

FUTA Reporting Requirements Form 940 or Form 940-EZ, due by 1/31 next year Except if only household employees, file Schedule H with individual 1040 tax return Can file 940-EZ if: Paid SUTA timely Paid SUTA to one state State is not in Title XII default SUTA taxable wages = FUTA taxable wages Can amend (check appropriate box above Part I) Upon cessation of business, check “final return” box

SUTA Deposit and Reporting Overview SUTA requirements vary widely by state In some states, EE withholding is required for SUTA, in that case both EE and ER SUTA deposited together SUTA quarterly contribution report generally shows: each employee’s gross wages and taxable SUTA wages (wage information) contribution rate x taxable SUTA wages amount of required payment

Additional SUTA Information Reports Status reports initial registration with state as employer liable for SUTA Separation Reports informs state of separated employees - aids in determination of eligibility for benefits Partial Unemployment Notices notifies state and employees (who have had their hours cut back to part time) of potential eligibility for partial unemployment benefits

Unemployment Compensation Benefits Each state individually qualifies and pays benefits to unemployed workers Claimant must meet strict requirements including ability and availability to work proof of actively seeking work Benefits vary by state; minimum and maximum amounts apply (average benefit = approximately 50% of gross wages) Some states distribute additional amounts for each dependent the worker has in his/her home

Unemployment Compensation Benefits (continued) Benefits in special situations Benefits continue past “normal” 26 week period if unemployed due to major disaster up to one year after disaster declaration Federal employees may receive benefits under state law in which EE last worked Unemployed ex-military personnel may receive benefits from state in which most recently separated from active service