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Understanding Unemployment Compensation Taxes: FUTA and SUTA Overview

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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. 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)) • 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

  5. 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

  6. 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 • Note: even if employer pays into more than one fund, credit still limited to 5.4% • 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) LO-3

  7. 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

  8. 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 • 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

  9. 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

  10. 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

  11. 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

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