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CHAPTER 5

CHAPTER 5. Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland. UNEMPLOYMENT COMPENSATION TAXES. Developed by Lisa Swallow, CPA CMA MS. Learning Objectives. Describe basic requirements for classification under Federal Unemployment Tax Act (FUTA)

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CHAPTER 5

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  1. CHAPTER 5 Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Learning Objectives • Describe basic requirements for classification under Federal Unemployment Tax Act (FUTA) • Define taxable wages under FUTA • Compute FUTA and credit against it • Describe how experience-rating system is used in determining state unemployment compensation (SUTA) • Complete reports required by FUTA • Describe types of information reports required under SUTA

  3. 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 state’s level In current economic situation, unemployment insurance programs are being stretched very thin! LO-1

  4. Who is Covered Under FUTA • Employers are liable for this tax if • Pay $1,500 or more of wages in anyquarter 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 employees LO-1

  5. 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 LO-1

  6. 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 LO-1

  7. 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 located (management, business records) • Where are operations directed (state where control exists) • Employee’s residence LO-1

  8. Reciprocal Arrangements • If factors from prior slide do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be utilized • State may enter into arrangements under which employer may elect coverage of the employee in one state • 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 LO-1

  9. 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 (pages 5-12 and 5-13) WA wage base cap at $39,800/year for 2013) • 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 and 5-8 LO-2

  10. Specifically Exempt Wages for FUTA • Advances or reimbursement of business expenses • Retirement pay • Educational assistance payments • Meals and lodging if for employer’s benefit • Strike benefits • Complete list on page 5-8 LO-2

  11. FUTA Rates • FUTA rate = 6.0% of first $7,000 of gross wages for each employee per year • 5.4% credit against FUTA (allowed for SUTA taxes)* Therefore gross 6.0% less 5.4% credit = .6% net FUTA *Even if experience rating allows employer to pay a lower rate than 5.4% LO-3

  12. 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 – for example, Michigan subject to additional rate if loans not repaid by 11/10/12) Note: even if employer pays into more than one fund, credit still limited to 5.4% LO-3

  13. FUTA Tax Rate • Assume the taxable wage of $39,000 for the year The wages actually paid to employees in 2012 in excess of $7,000 each amounted to $26,000. Total amt. charged to wages $39,000.00 Less: Wages paid in excess of $7,000 limit ($26,000.00) Total Taxable Wages $13,000.00 Rate of Tax x 6.0% Amount of gross FUTA tax $ 780.00 Total Tax Credit ( 13,000 x 5.4%) (702.00) Amount of Net FUTA tax (13,000 x .6%) $ 78.00

  14. FUTA Tax Rate • Assume the Mirage Corp has a $70,000 federal and state taxable payroll and earned a reduced state tax rate of 4%. If Mirage was late in making the deposit, the FUTA tax calculation would be as follows: Gross FUTA tax (70,000 x .06) $ 4,200 Less 90% credit for state taxes paid late (70K x 4% x 90%) 2,520 Less additional credit for state tax if rate were 5.4% (70,000 x (5.4 – 4)) 980 Total Credit $ 3,500 Net FUTA Tax $ 700 If Mirage had paid on time FUTA would be ($70,000 x .006) = $420 a saving of $280

  15. Problems • 5 - 2A, 5 - 6A, 5 - 7A

  16. SUTA Laws & Rates • Each employer’s rate based upon experience rating (see next slide) • New employer’s pay an initial contribution rate that applies for specific period of time • 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 LO-4

  17. SUTA Rates • Experience rating reflects stability of employer’s employment history • Lower unemployment rate reflected in lower rate • 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 • Negative balance employers will experience higher tax rates • Some states require employees to contribute to SUTA • Some states reduce rates if employers make voluntary contributions to state fund – this increases reserve account and thereby lowers future SUTA rate LO-4

  18. Problems • 5 – 9A, 5 – 10A, 5 – 14A

  19. 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 • File 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 • When filing a corrected form, mark the “Amended” box and include explanation as to why an amended return is filed • A final return must be filed in year company ceases doing business LO-5

  20. FUTA Reporting Requirements 940 has multiple sections Part 1 - Information about SUTA payments 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 – 7 Delineate 3rd 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 File Schedule A to accompany 940 if multi-state ER or reduced credit LO-5

  21. FUTA Deposit Overview • Deposit quarterly - but only if cumulatively over $500 • Required to deposit federal taxes electronically unless employer has $2,500 or less in quarterly tax liabilities 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 LO-5

  22. 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 voucher 940V Penalties apply for failing to file 940 return, pay FUTA taxes when due and/or make timely deposits LO-5

  23. SUTA Deposit & 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 multiplied by taxable SUTA wages • Amount of required payment • Usually includes wage information report per employee LO-6

  24. 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 In an increasing number of states, electronic filing of reports and payment of tax are required LO-6

  25. Problem • 5 – 16 A

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