CHAPTER 5

1. CHAPTER 5 UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

2. FUTA and SUTA • FUTA • Federal Unemployment Tax Act • Employer tax required for administration of federal and state unemployment insurance • SUTA • State Unemployment Tax Acts • Different for each state • Funds used to pay benefits and administer program at state level

3. Who Pays FUTA • FUTA passed to comply with SSA of 1935 • Employers are liable for this tax if they: • Pay $1500 of wages in anyquarter in current or prior year • Employ one or more person in one day of 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

4. Services Covered under FUTA General rule is everyone is EE if common-law relationships exists (with specific exceptions as follows) • Partners • Directors • Independent contractors • Kids under 21 working for parents • RRTA or governmental employees • Nonprofits (church, educational, etc.) • Complete list on page 5-4

5. SUTA and Interstate EE • Generally covered under SUTA if covered under FUTA • Multi-state employees - which state does ER pay SUTA to (apply following in order) • where is work localized (work primarily performed) • where is the operational base (management, business records) • where are operations directed (state where control exists) • employee’s place of residence • If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned (in most states)

6. Taxable Wages for FUTA/SUTA • Taxable FUTA wage base caps at $7000 per employee per year • Taxable SUTA wage base caps at different amount in each state • Wages include: • bonuses, advances, severance pay • stock compensation (FMV) • tips • complete list in chapter 5

7. Specifically Exempt Wages for FUTA • Workers compensation payments • Retirement pay • Educational assistance payments if part of nondiscriminatory plan • Meals and lodging, if for ER’s benefit • Strike benefits • Complete list in chapter 5

8. FUTA Rates • FUTA = 6.2% of first $7000 of gross wages for each employee per year • 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 by due date of form 940 • Been located in 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 compensationfunds from federal government

9. FUTA Deposit and Reporting Overview Deposit quarterly (but only if cumulatively over $100) • 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 File annually • Form 940 due by 1/31 of following year

10. How Much FUTA to Deposit • If $100 or more, must deposit • If less, can wait and add to next quarter, then if it’s $100 or more, must deposit • If never gets over $100, pay with form 940 or 940-EZ at year end • Use 8109 coupon and deposit with Federal Reserve Bank or deposit electronically

11. FUTA Reporting Requirements • Form 940 or 940-EZ by 1/31 next year • Unless only household employees, then can file Schedule H with the individual 1040 tax return • Can file form 940-EZ 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

12. SUTA Deposit and Reporting Overview • SUTA requirements vary widely by state • In some states, EE withholding is required for SUTA, in that case EE and ER SUTA 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

13. 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

14. Unemployment Compensation Benefits • Each state individually qualifies and pays unemployed workers • Claimant must meet strict requirements including: • ability and availability to work • proof of actively seeking work • Varying minimum and maximum amounts (average benefit = approximately 50% of gross wages) • Some states distribute additional amounts for each dependent the worker has in his/her home

15. Unemployment Compensation Benefits (continued) • Benefits in special situations • Benefits continue past “normal” 26 week period if unemployed due to major disaster (up to one year after disaster declaration) • Federal employees may receive benefits under state law in which EE last worked • Unemployed military personnel may receive benefits from the state in which most recently separated from active service