CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS...
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Transcript of CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS...
CHAPTER 5
UNEMPLOYMENTUNEMPLOYMENT COMPENSATION TAXESCOMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS
Payroll Accounting 2010
Bernard J. Bieg and Judith A. Toland
FUTA and SUTAFUTA
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!
Who is Covered Under FUTA FUTA originated through passage of SSA of 1935 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
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
Who is Covered Under SUTA
Employees generally covered under SUTA if covered under FUTALikewise employers specifically excluded under
federal law generally excluded under state lawsMany 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
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
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
Taxable Wages for FUTA/SUTA
Taxable FUTA wage base caps at $7,000/yearTaxable SUTA wage base caps at different
amount in each state (Figure 5-1 on pages 5.12 - 5.14)
Wages includeBonuses, advances, severance payStock compensation - fair market value TipsRetroactive wage increasesComplete list of taxable wages found on pages
5.7 – 5.8
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
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 ER to pay a lower rate than 5.4%
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)
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
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
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
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 third party designee, paid
preparer and signIndividual may sign if sole proprietorshipPrincipal officer may sign if corporationDuly authorized member may sign if partnershipFiduciary may sign if trust or estate
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
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 Form 8109 coupon and deposit with an authorized depository Or if employer deposits other federal
payroll taxes electronically, must deposit FUTA electronically
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
Additional SUTA Information Reports
Forms vary by state but may includeStatus 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 benefitsPartial Unemployment Notices
Notifies state and the employees who have had their hours cut back to part-time of potential eligibility for partial unemployment benefits