UNEMPLOYMENT

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CHAPTER 5
Payroll Accounting 2008 Bernard J. Bieg and
Judith A. Toland

• UNEMPLOYMENT
• COMPENSATION TAXES

Developed by Lisa Swallow, CPA CMA MS
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FUTA and SUTA

• FUTA
• Federal Unemployment Tax Act
• 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 states level

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Who is Covered under FUTA

• FUTA passed to comply with 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, in 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

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Employees Covered under FUTA

• General rule is everyone is considered an EE if
  common-law relationship exists
• Also included
• Drivers who distribute food/beverage or deliver
  laundry
• 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 5.55.6

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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
• Is the person free from control/direction
• Is work performed outside usual course of
  business
• Is person customarily engaged in an independent
  trade or business

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Interstate Employees and SUTA

• With multi-state employees, there is an issue as
  to which state does ER pay SUTA (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)
• Employees residence
• If above does not yield appropriate answer,
  Interstate Reciprocal Coverage Arrangement may be
  fashioned (in most states)
• Americans working overseas for American company
  are covered

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SUTA Laws Rates

• Each employers rate based upon employee turnover
  and state in which business is located
• Some states utilize reserve-ratio formula to
  lower contributions based on low risk of
  unemployment
• Some states reduce rates if employers make
  voluntary contributions to state fund
• 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

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SUTA Rates

• Some states require employees to contribute to
  SUTA
• Experience rating reflects stability of ERs
  employment history
• Provides for reduction in SUTA rates

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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 5.13 - 5.15)
• Wages include
• Bonuses, advances, severance pay
• Stock compensation - fair market value
• Tips
• Complete list (pp 5.8 - 5.9)

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Specifically Exempt Wages for FUTA

• Workers compensation payments
• Advances or reimbursement of business expenses
• Retirement pay
• Educational assistance payments
• If part of nondiscriminatory plan
• Meals and lodging
• If for employers benefit
• Strike benefits
• Complete list on p. 5-9

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FUTA Rates

• FUTA 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
• 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
• Title XII allows states to borrow unemployment
  compensation funds from federal government
• Credit is reduced (.3 per year beginning the
  second year after the advance)
• Even if experience rating allows ER to pay a
  lower rate than 5.4

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FUTA Deposit and Reporting 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
• Form 940 due by 1/31 of following year
• Filed annually
• If falls on Saturday, Sunday or legal holiday,
  have until following business day

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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 its 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

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FUTA Reporting Requirements

• Complete Parts I-III of 940 if liability is over
  500
• Questions requiring an answer on 940 (see figure
  5-2, p. 5-21-5-22)
• Part I Tell us about your return
• Part II Calculate FUTA tax before adjustments
• Part III Determine adjustments
• Part IV Compare adjusted FUTA tax to deposits
  and calculated balance due or overpayment
• Part V Report FUTA liability by quarter only if
  line 12 500
• Parts VI VII Delineate third party designee
  and sign

• if any line does not apply, leave it blank

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How to File 940

• Form 940 due by 1/31 next year
• Or if timely deposits have been made can file
  through 2/10
• 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
• Can e-file after submit electronic letter of
  application

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SUTA Deposit and Reporting Overview

• SUTA requirements vary widely by state
• In the states that EE withholding is required
• In that case SUTA for both EE and ER deposited
  together
• SUTA quarterly contribution report generally
  shows
• Each employees 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

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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 employees (who have had their
  hours cut back to part-time) of potential
  eligibility for partial unemployment benefits