CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS Payroll Accounting 2006 Bernard J. Bieg

FUTA and SUTA  FUTA 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

Who is Covered under 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

Employees Covered under FUTA  General rule is everyone is considered an EE if common-law relationships exists Also included  Drivers who distribute food/beverage  Traveling salespeople [specific situations] 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

Who is Covered under SUTA  Employees generally covered under SUTA if covered under FUTA  Many states apply “ABC” test for SUTA exclusion Is the person free from control/direction Is work performed outside usual course of business Is person usually engaged in an independent trade or business

Interstate Employees and SUTA  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 exist)  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 )  Wages include: bonuses, advances, severance pay stock compensation  fair market value tips complete list (pp )

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

FUTA Rates  FUTA = 6.2% of first $7,000 of gross wages for each employee per year.2% surcharge expires in 2007  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 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  Form 940 due by 1/31 of following year Filed annually *If falls on Saturday, Sunday or legal holiday, have until following business day

FUTA Reporting Requirements  Form 940 due by 1/31 next year  Revised 2005 – combines 940 and 940-EZ  Only need to complete specific sections of 940 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

How Much FUTA to Deposit  If $500 or more, must deposit  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 Form 8109 coupon and deposit with an authorized depository

SUTA Deposit and Reporting Overview  SUTA requirements vary widely by state  In some states, EE withholding is required for SUTA in that case both SUTA for both EE and ER 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 usually includes wage information report per employee

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