UNEMPLOYMENT

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CHAPTER 5
Payroll Accounting 2010 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
• 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 states level
• In current economic situation, unemployment
  insurance programs are being stretched very thin!

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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

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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

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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
  (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

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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)
• Employees residence

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Reciprocal Arrangements

• If factors from prior slide do not yield
  appropriate answer, Interstate Reciprocal
  Coverage Arrangement may be fashioned
• Employer covers all workers 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

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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 (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

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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 employers benefit
• Strike benefits
• Complete list on page 5.8

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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

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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)

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SUTA Laws Rates

• Each employers 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

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SUTA Rates

• Experience rating reflects stability of ERs
  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

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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

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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 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

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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

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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
• Or if employer deposits other federal payroll
  taxes electronically, must deposit FUTA
  electronically

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