CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES - PowerPoint Presentation

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CHAPTER 5

UNEMPLOYMENT

COMPENSATION TAXES

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FUTA and SUTA

FUTA

Federal Unemployment Tax Act

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 levelSlide3

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 employerSlide4

Employees Covered Under FUTA

General rule is everyone is considered an EE if common-law relationship exists

Also included

Drivers who distribute food/beverage or deliver laundry

Traveling salespeople (specific situations)

Specific exceptions as follows

Partners

Directors

Independent contractors

Home workers

Full-time life insurance salespeople

Children under 21 working for parents

RRTA or governmental employees

Nonprofits (church, educational, etc.)

Complete list on page 5.4Slide5

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

Is the worker free from control/direction

Is work performed outside usual course of business

Is person customarily engaged in an independent trade or businessSlide6

Interstate Employees and SUTA

With multi-state employees, sometimes a question arises as to which state ER should pay SUTA to

(apply following in order)

Where is work localized (work primarily performed)

Where is operational base (management, business records)

Where are operations directed (state where control exists)

Employee’s residence

If above does not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned

Americans working overseas for American company are covered

In all states except five and Puerto RicoSlide7

SUTA Laws & Rates

Each employer’s rate based upon

Employee turnover and

State in which business is located

Some states utilize reserve-ratio formula to lower contributions based on low risk of unemployment

Some states reduce rates if employers make voluntary contributions to state fund

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 entitiesSlide8

SUTA Rates

Experience rating

reflects stability of ER’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

Some states require employees to contribute to SUTA

Some states allow ERs to reduce SUTA rates by making voluntary contributions to state fundSlide9

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 (pp 5.13 - 5.15)

Wages include

Bonuses, advances, severance pay

Stock compensation - fair market value

Tips

Retroactive wage increases

Complete list of taxable wages found on pp 5.8 - 5.9Slide10

Specifically Exempt Wages for FUTA

Bonuses under supplemental compensation plan paid upon retirement, death or disability

Advances or reimbursement of business expenses

Retirement pay

Educational assistance payments

If part of nondiscriminatory plan

Meals and lodging i

f for employer’s benefit

Strike benefits

Complete list on page 5.9Slide11

FUTA Rates

FUTA = 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%Slide12

Credits Against FUTA Tax

To get full 5.4% credit 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

Provides unemployment compensation funds from federal government

Credit is reduced (.3% per year beginning the second year after the advance)Slide13

FUTA Deposit and Reporting 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

Form 940 due by 1/31 of following year

Filed annually

*If falls on Saturday, Sunday or legal holiday, have until following business daySlide14

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 Form 8109 coupon and deposit with an authorized depositorySlide15

FUTA Reporting Requirements

940 has multiple sections

Part I

-

Did company pay SUTA to one state?

Part II – Calculate FUTA tax before adjustments

Part III – Determine adjustments

Part IV – Compare adjusted FUTA tax to deposits and calculated balance due or overpayment

Part V – Report FUTA liability

Parts VI – VIII – 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 estateSlide16

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

Can e-file after submit electronic letter of application to IRS

A final return must be filed in year company ceases doing businessSlide17

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

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 employeeSlide18

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