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CHAPTER 5

Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland. CHAPTER 5. 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. Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland CHAPTER 5 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) funds • 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 on pages 5-102 through 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 and 5-8 *Discussion as to new wage base and rate being discussed as of print time LO-2

  10. 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 employer’s benefit • Strike benefits • Complete list on page 5-8 LO-2

  11. 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 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 11/10/11) LO-3

  13. SUTA Laws & Rates • Each employer’s 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 LO-4

  14. SUTA Rates • Experience rating reflects stability of employer’s 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 LO-4

  15. 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 LO-5

  16. 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 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

  17. 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 LO-5

  18. 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 940-V LO-5

  19. 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 x taxable SUTA wages • Amount of required payment • Usually includes wage information report per employee LO-6

  20. 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

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