CHAPTER 5CHAPTER 5

UNEMPLOYMENT UNEMPLOYMENT COMPENSATION TAXESCOMPENSATION TAXES

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Payroll Accounting 2004 Payroll Accounting 2004 Bernard J. BiegBernard J. Bieg

FUTA and SUTAFUTA and SUTA

FUTAFUTA Federal Unemployment Tax ActFederal Unemployment Tax Act

Employer tax required for administration of federal and Employer tax required for administration of federal and state unemployment insurance programsstate unemployment insurance programs

SUTASUTA State Unemployment Tax ActsState Unemployment Tax Acts

Different for each stateDifferent for each state Funds used to pay benefits and administer program at Funds used to pay benefits and administer program at

individual state’s levelindividual state’s level

Who Pays FUTAWho Pays FUTA

FUTA passed to comply with SSA of 1935FUTA passed to comply with SSA of 1935 Employers are liable for this tax ifEmployers are liable for this tax if

Pay $1,500 of wages in Pay $1,500 of wages in anyany quarter in current or prior yearquarter in current or prior year Employ one or more persons, in one day in each of 20 weeks in Employ one or more persons, in one day in each of 20 weeks in

current or prior yearcurrent or prior year

**Then liable for FUTA for entire year****Then liable for FUTA for entire year**

Employees includeEmployees include part time, temps and regular workerspart time, temps and regular workers workers on vacation/sick leaveworkers on vacation/sick leave

Services Covered under Services Covered under FUTAFUTA

General rule is everyone is considered an EE if General rule is everyone is considered an EE if common-law relationships exists (with specific common-law relationships exists (with specific exceptions as follows)exceptions as follows)

PartnersPartners DirectorsDirectors Independent contractorsIndependent contractors Children under 21 working for parentsChildren under 21 working for parents RRTA or governmental employeesRRTA or governmental employees Nonprofits (church, educational, etc.)Nonprofits (church, educational, etc.) Complete list on page 5-6Complete list on page 5-6

SUTA and Interstate EESUTA and Interstate EE Generally covered under SUTA if covered under FUTAGenerally covered under SUTA if covered under FUTA Multi-state employees: issue is to which state does ER Multi-state employees: issue is to which state does ER

pay SUTA to (apply following in order)pay SUTA to (apply following in order) where is work localized (work primarily performed)where is work localized (work primarily performed) where is operational base (management, business records)where is operational base (management, business records) where are operations directed (state where control exists)where are operations directed (state where control exists) employee’s residenceemployee’s residence

If above do not yield appropriate answer, Interstate If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be Reciprocal Coverage Arrangement may be fashioned (in fashioned (in most most states)states)

Americans working overseas for American company are coveredAmericans working overseas for American company are covered

Taxable Wages for Taxable Wages for FUTA/SUTAFUTA/SUTA

Taxable FUTA wage base caps at $7,000/yearTaxable FUTA wage base caps at $7,000/year Taxable SUTA wage base caps at different Taxable SUTA wage base caps at different

amount in each state (pp 5.13 - 5.15)amount in each state (pp 5.13 - 5.15) Wages include:Wages include:

bonuses, advances, severance paybonuses, advances, severance pay stock compensation (FMV) stock compensation (FMV) tipstips complete list (pp 5.8 - 5.9)complete list (pp 5.8 - 5.9)

Specifically Exempt Specifically Exempt Wages for FUTAWages for FUTA

Worker’s compensation paymentsWorker’s compensation payments Retirement payRetirement pay Educational assistance payments if Educational assistance payments if

part of nondiscriminatory planpart of nondiscriminatory plan Meals and lodging, if for ER’s benefitMeals and lodging, if for ER’s benefit Strike benefitsStrike benefits Complete list on page 5.9Complete list on page 5.9

FUTA RatesFUTA Rates FUTA = 6.2% of first $7,000 of gross wages for each FUTA = 6.2% of first $7,000 of gross wages for each

employee per yearemployee per year 5.4% credit against FUTA made for SUTA5.4% credit against FUTA made for SUTA

Therefore gross = 6.2% - 5.4% credit = .8% netTherefore gross = 6.2% - 5.4% credit = .8% net

To get 5.4% credit must have:To get 5.4% credit must have: Made SUTA contributions on timely basisMade SUTA contributions on timely basis Been located in a state that is not in default on their Title XII advances 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 (credit is reduced .3% per year beginning the second year after the advance)advance) Title XII is the act that allows states to borrow unemployment compensation Title XII is the act that allows states to borrow unemployment compensation

funds from federal governmentfunds from federal government

FUTA Deposit and FUTA Deposit and Reporting OverviewReporting Overview

Deposit quarterly (but only if cumulatively over $100)Deposit quarterly (but only if cumulatively over $100) 1/1-3/31 deposit by 4/30*1/1-3/31 deposit by 4/30* 4/1-6/30 deposit by 7/31*4/1-6/30 deposit by 7/31* 7/1-9/30 deposit by 10/31*7/1-9/30 deposit by 10/31* 10/1-12/31 deposit by 1/31* 10/1-12/31 deposit by 1/31*

File annuallyFile annually Form 940 due by 1/31 of following yearForm 940 due by 1/31 of following year

*If falls on Saturday, Sunday or legal holiday, have until following business day*If falls on Saturday, Sunday or legal holiday, have until following business day

How Much FUTA How Much FUTA to Depositto Deposit

If $100 or more, must depositIf $100 or more, must deposit If less, can wait and add to next quarter, If less, can wait and add to next quarter,

then if it’s $100 or more, must depositthen if it’s $100 or more, must deposit If never gets over $100, pay with Form 940 If never gets over $100, pay with Form 940

or 940-EZ at year endor 940-EZ at year end Use Form 8109 coupon and deposit with Use Form 8109 coupon and deposit with

an authorized depositoryan authorized depository

FUTA Reporting FUTA Reporting RequirementsRequirements

Form 940 or Form 940-EZ, due by 1/31 next yearForm 940 or Form 940-EZ, due by 1/31 next year Except if only household employees, file Schedule Except if only household employees, file Schedule

H with individual 1040 tax returnH with individual 1040 tax return Can file 940-EZ if:Can file 940-EZ if:

Paid SUTA timelyPaid SUTA timely Paid SUTA to one statePaid SUTA to one state State is not in Title XII defaultState is not in Title XII default SUTA taxable wages = FUTA taxable wagesSUTA taxable wages = FUTA taxable wages

Can amend (check appropriate box above Part I)Can amend (check appropriate box above Part I) Upon cessation of business, check “final return” boxUpon cessation of business, check “final return” box

SUTA Deposit and SUTA Deposit and Reporting OverviewReporting Overview

SUTA requirements vary widely by stateSUTA requirements vary widely by state In some states, EE withholding is required for In some states, EE withholding is required for

SUTA, in that case both EE and ER SUTA SUTA, in that case both EE and ER SUTA deposited togetherdeposited together

SUTA quarterly contribution report generally SUTA quarterly contribution report generally shows:shows: each employee’s gross wages and taxable SUTA each employee’s gross wages and taxable SUTA

wages (wage information)wages (wage information) contribution rate contribution rate xx taxable SUTA wages taxable SUTA wages amount of required paymentamount of required payment

Additional SUTA Additional SUTA Information ReportsInformation Reports

Status reportsStatus reports initial registration with state as employer liable for initial registration with state as employer liable for

SUTASUTA Separation ReportsSeparation Reports

informs state of separated employees - aids in informs state of separated employees - aids in determination of eligibility for benefitsdetermination of eligibility for benefits

Partial Unemployment NoticesPartial Unemployment Notices notifies state and employees (who have had their notifies state and employees (who have had their

hours cut back to part time) of potential eligibility for hours cut back to part time) of potential eligibility for partial unemployment benefits partial unemployment benefits

Unemployment Unemployment Compensation BenefitsCompensation Benefits Each state individually qualifies and pays Each state individually qualifies and pays

benefits to unemployed workersbenefits to unemployed workers Claimant must meet strict requirements includingClaimant must meet strict requirements including

ability and availability to workability and availability to work proof of actively seeking workproof of actively seeking work

Benefits vary by state; minimum and maximum Benefits vary by state; minimum and maximum amounts apply (average benefit = approximately amounts apply (average benefit = approximately 50% of gross wages)50% of gross wages)

Some states distribute additional amounts for each Some states distribute additional amounts for each dependent the worker has in his/her homedependent the worker has in his/her home

Unemployment Unemployment Compensation Benefits Compensation Benefits

(continued)(continued) Benefits in special situationsBenefits in special situations

Benefits continue past “normal” 26 week period if Benefits continue past “normal” 26 week period if unemployed due to major disaster unemployed due to major disaster up to one year after disaster declarationup to one year after disaster declaration

Federal employees may receive benefits under state Federal employees may receive benefits under state law in which EE last workedlaw in which EE last worked

Unemployed ex-military personnel may receive Unemployed ex-military personnel may receive benefits from state in which most recently separated benefits from state in which most recently separated from active servicefrom active service