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CHAPTER 5

CHAPTER 5. Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland. UNEMPLOYMENT COMPENSATION TAXES . Developed by Lisa Swallow, CPA CMA MS. FUTA and SUTA. FUTA Federal Unemployment Tax Act Federal law that imposes an employer tax

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CHAPTER 5

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  1. CHAPTER 5 Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

  2. 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 level

  3. 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 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 employer

  4. 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 5.4

  5. 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 business

  6. 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 Rico

  7. 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 entities

  8. 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 fund

  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 (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 - 5.9

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

  11. 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%

  12. 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)

  13. 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 day

  14. 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 depository

  15. 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 estate

  16. 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 business

  17. 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 employee

  18. 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

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