CHAPTER 5 CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland

Learning Objectives  Describe basic requirements for classification under Federal Unemployment Tax Act (FUTA)  Define taxable wages under FUTA  Compute FUTA and credit against it  Describe how experience-rating system is used in determining state unemployment compensation (SUTA) funds  Complete reports required by FUTA  Describe types of information reports required under SUTA

FUTA and SUTA  FUTA  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! LO-1

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 employees LO-1

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 LO-1

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 LO-1

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 located (management, business records)  Where are operations directed (state where control exists)  Employee’s residence LO-1

Reciprocal Arrangements  If factors from prior slide do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be utilized  State may enter into arrangements under which employer may elect coverage of the employee in one state  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 LO-1

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 through 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 and 5-8 *Discussion as to new wage base and rate being discussed as of print time LO-2

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 LO-2

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 employer to pay a lower rate than 5.4% LO-3

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 11/10/11) LO-3

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 LO-4

SUTA Rates  Experience rating reflects stability of employer’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 LO-4

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 LO-5

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 3 rd 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 LO-5

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 LO-5

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  Use voucher 940-V LO-5

SUTA Deposit & 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 LO-6

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 In an increasing number of states, electronic filing of reports and payment of tax are required LO-6