CHAPTER 5

UNEMPLOYMENTUNEMPLOYMENTCOMPENSATION TAXESCOMPENSATION TAXES

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Payroll Accounting 2006 Payroll Accounting 2006 Bernard J. BiegBernard J. Bieg

FUTA and SUTA

FUTA Federal Unemployment Tax Act

Employer tax required for administration of federal and state unemployment insurance programs

SUTA State Unemployment Tax Acts

Different for each state Funds used to pay benefits and administer

program at individual state’s level

Who is Covered under FUTA

FUTA passed to comply with SSA of 1935 Employers are liable for this tax if

Pay $1,500 of wages in any quarter in current or prior year

Employ one or more persons, in one day in each of 20 weeks in current or prior year

**Then liable for FUTA for entire year**

Employees include• Part time, temps and regular workers• Workers on vacation/sick leave

Employees Covered under FUTA

General rule is everyone is considered an EE if common-law relationships exists Also included

Drivers who distribute food/beverage Traveling salespeople [specific situations]

Specific exceptions as follows Partners Directors Independent contractors Children under 21 working for parents RRTA or governmental employees Nonprofits (church, educational, etc.) Complete list on page 5-6

Who is Covered under SUTA

Employees generally covered under SUTA if covered under FUTA

Many states apply “ABC” test for SUTA exclusion Is the person free from control/direction Is work performed outside usual course of

business Is person usually engaged in an independent

trade or business

Interstate Employees and SUTA

Multi-state employees: issue is to which state does ER 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

exist) employee’s residence

If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned (in most states)

Americans working overseas for American company are covered

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 complete list (pp 5.8 - 5.9)

Specifically Exempt Wages for FUTA

Worker’s compensation payments Retirement pay Educational assistance payments

if part of nondiscriminatory plan Meals and lodging

if for employer’s benefit Strike benefits Complete list on page 5.9

FUTA Rates FUTA = 6.2% of first $7,000 of gross wages for each

employee per year .2% surcharge expires in 2007

5.4% credit against FUTA made for SUTA

Therefore gross = 6.2% - 5.4% credit = .8% net

To get 5.4% credit must have: Made SUTA contributions on timely basis Been located in a state that is not in default on their Title XII

advances (credit is reduced .3% per year beginning the second year after the advance)

Title XII is the act that allows states to borrow unemployment compensation funds from federal government

FUTA Deposit and Reporting Overview

Deposit quarterly But only if cumulatively over $100 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 day

FUTA Reporting Requirements

Form 940 due by 1/31 next year Revised 2005 – combines 940 and 940-EZ Only need to complete specific sections of 940 if

Paid SUTA timely Paid SUTA to one state State is not in Title XII default SUTA taxable wages = FUTA taxable wages

Can amend (check appropriate box above Part I) Upon cessation of business, check “final return”

box

How Much FUTA to Deposit

If $500 or more, must deposit 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 depository

SUTA Deposit and Reporting Overview

SUTA requirements vary widely by state In some states, EE withholding is required

for SUTA in that case both SUTA for both EE and ER

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

employee

Additional SUTA Information Reports

Status reports initial registration with state as employer liable

for SUTA 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