State and Local Taxation

1
State and Local Taxation

• Chapter 6
• Unemployment Taxes

2
Unemployment Taxes

• Employers are subject to a Federal unemployment
  tax (FUTA) of 6.2 on the first 7,000 of
  compensation paid to an employee
• Unemployment taxes use to fund unemployment
  insurance
• Unemployment insurance funded almost entirely by
  direct taxes levied on employers

3
Unemployment Taxes

• State unemployment programs are administered
  under state law
• Federal government has provided some uniformity
  through guidelines.

4
Unemployment Taxes

• Unemployment tax rates
• Varies by state
• Rate bases range between 7,000 and 25,800
• Cannot be lower than 7,000 per employee
• Varies by employer
• Determined through rating system, can be as high
  as 11 or as low as 0
• Four methods to calculate tax rates reserve
  ratio, benefit ratio, benefit wage ratio, and
  payroll decline

5
Planning Techniques

• Avoiding Employee Classification
• Use of independent contractors
• Employee Leasing
• Leases employees from a company that specializes
  in employee leasing
• Less control over employee availability, effort,
  and skill
• Operating in a New State
• Assigned new employer unemployment tax rate

6
Planning Techniques

• Acquisition of Another Company
• Successor may inherit predecessors favorable
  unemployment tax rate or wage base limitations
• Successor may be liable for contributions and
  unemployment taxes owed, if not previously
  negotiated as part of sale.
• Business Restructuring
• Prior to downsizing, spin off sector with
  favorable tax rate
• Existing corporation would be isolated from
  negative unemployment tax impact of downsizing.
• Selling Off Part of the Business
• Favorable unemployment tax rate is as asset to be
  considered when valuing a division for sale.