CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS Payroll Accounting 2004 Bernard J. Bieg

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

Who Pays FUTA yFUTA passed to comply with SSA of 1935 yEmployers 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** yEmployees include ypart time, temps and regular workers yworkers 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) yPartners yDirectors yIndependent contractors yChildren under 21 working for parents yRRTA or governmental employees yNonprofits (church, educational, etc.) yComplete list on page 5-6

SUTA and Interstate EE yGenerally covered under SUTA if covered under FUTA yMulti-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 yIf 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 yTaxable FUTA wage base caps at $7,000/year yTaxable SUTA wage base caps at different amount in each state (pp ) yWages include:  bonuses, advances, severance pay  stock compensation (FMV)  tips  complete list (pp )

Specifically Exempt Wages for FUTA yWorker’s compensation payments yRetirement pay yEducational assistance payments if part of nondiscriminatory plan yMeals and lodging, if for ER’s benefit yStrike benefits yComplete list on page 5.9

FUTA Rates yFUTA = 6.2% of first $7,000 of gross wages for each employee per year y5.4% credit against FUTA made for SUTA Therefore gross = 6.2% - 5.4% credit =.8% net yTo 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 yIf $100 or more, must deposit yIf less, can wait and add to next quarter, then if it’s $100 or more, must deposit yIf never gets over $100, pay with Form 940 or 940-EZ at year end yUse Form 8109 coupon and deposit with an authorized depository

FUTA Reporting Requirements yForm 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 yCan amend (check appropriate box above Part I) yUpon cessation of business, check “final return” box

SUTA Deposit and Reporting Overview ySUTA requirements vary widely by state yIn some states, EE withholding is required for SUTA, in that case both EE and ER SUTA deposited together ySUTA 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 yStatus reports  initial registration with state as employer liable for SUTA ySeparation Reports  informs state of separated employees - aids in determination of eligibility for benefits yPartial 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 yEach 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) yBenefits 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