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

2. 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!

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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 %
less 5.4% credit
= .8% net FUTA
*Even if experience rating allows ER to pay a lower rate than 5.4%

11. 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)

12. 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

13. 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

14. 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

15. FUTA Reporting Requirements
940 has multiple sections
Part 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 – 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

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

17. 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

18. 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

19. 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

20. 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 = $
Net SUTA tax…………. $77,000 X = $ 4,851.00
Total unemployment taxes………………. $ 5,467.00

21. 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

22. 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 = $ 1,092.00
SUTA taxes paid to Indiana…. $ 23,000 X = $
SUTA taxes paid to Ohio……. $ 65,000 X = $ 2,665.00
FUTA taxes paid……………. $ 94,500 X = $

23. 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 $ 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 × = $

24. 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 × = $158.40
$2,050 × = $77.90
$7,000 × = $56.00

25. 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 (use the employee’s tax rate shown in Figure 5-1 in the text on page 5-12)
$194,300 × = $9,909.30
$ 93,400 × = $747.20
$194,300 × = $971.50

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