PT= 3 & 7 PS= 7
• Federal Unemployment Tax
– Who pays FUTA
– Exempt wages
– Exempt Employment
– FUTA Tax Rate & Wage Base
– Depositing & Reporting FUTA tax
– Calculating the State Credits
– Form 940
– Penalties for noncompliance
AGENDA
• State Unemployment Insurance
– Employment Relationship
– SUI Taxable wages
– Contribution rates & Experience rates
– Voluntary Contributions
– Joint or combined accounts
– Unemployment Benefits Process
– Reporting Requirements
• State Disability Insurance
Who must pay FUTA?
•Nonfarm employers paying $1,500 or more in covered wages in any calendar
quarter (current or preceding year)
•Nonfarm employers employing at least one employee for at least one day in
20 different weeks(not consecutive) (current or preceding year)
•Farm employers paying $20,000 or more in covered wages in any calendar
quarter (current or preceding year)
•Farm employers employing at least 10 employees for at least part of one day
in 20 different weeks(not consecutive) (current or preceding year)
•Employers paying domestic employees $1,000 or more in any calendar
quarter (current or preceding year) for work in private home, college club,
fraternity or sorority
Who does not pay FUTA
Easier to say who does not pay. . .
•Federal, State and Local government employees including Indian Tribes
•Nonprofit, religious, charitable or educational organizations that are tax
exempt
Exempt Wages
• Sick or disability benefits paid
more than six calendar months
• Sickness or injury payments made
under a state workers comp law
• Payments made under a 125 flex
plan-other than adoption or
deferred compensation
• Noncash payments for work
outside the employers business
• Qualified moving expense
• Death or disability retirement
benefits
• Noncash payments to agricultural
workers
• Reimbursement or provision for
educational or dependent care
assistance
• The value of GTL(entire amount )
• Value of deductible meals &
lodging provided by employer
• Wages paid to a beneficiary after
the year of an employees death
• Tips not reported by an employee
Exempt Employment Types
• Federal, state, local government
employers including political
subdivisions
• Work on a foreign ship outside U.S.
• Work by full time students at the
school they are attending
• Work for a foreign government or
international organization
• Student nurses or hospital interns
• Insurance agents, commission only
• Newspaper deliverers under 18
• Non immigrant aliens under F, J, M
or Q visas
• Work for a spouse or child
• Work performed by a child under 21
for their parents
• Work by inmates of a penal
institution
• Work by election worker paid <
$1500 in 2011
• Alien agricultural workers under an
H-2A visa
• Statutory nonemployees
FUTA Tax Rate / Wage Base
FUTA Tax rate is 6.2%
Comprised of :
6.0 % permanent rate
.2% surcharge
Tax is employer paid
Some states have
employee contributions
mandated.
Rate is applied to the
first $7,000 of an
employee’s
covered wages
The surcharge was due to expire at the end of 2009. However, the
Worker, Homeownership and Business Assistance Act of 2009
extended the .2% surcharge through June 30, 2011.
The .2% surcharge was allowed to lapse effective July 1, 2011.
Constructive payment rules apply – doesn’t matter WHEN wages
were earned. DOES matter when they are PAID.
FUTA Tax Rate / Wage Base
If employers pay their state unemployment taxes in full and on time
a credit up to 5.4% can be taken
Full credit allows for tax calculation to be .8 % PRIOR TO 7/1/11
Maximum paid $7.000 x .8% = $56.00 per employee
AFTER 7/1/11 – Full credit allows for tax calculation to be .6%
Maximum paid $7.000 x .6% = $42.00 per employee
Payment by successor companies based on the company application of
the Social Security tax payment – however both predecessor and
successor must be covered under FUTA.
Common paymaster companies follow the same practice as the
withholding and payments for Social Security and Medicare
Depositing & Paying FUTA Tax
Employers can assume the credit for the first three quarters of a calendar year
thus multiplying taxable wages by .6% --up to $7,000 wage base limit for a
maximum of $42.00 per employee
If amount for all employees is $500 or greater then the deposit is due respectively
1st quarter--- April 30
2nd quarter-- July 31
3rd quarter – October 31
If under $500 then the amount need not be deposited but carry over to the next
quarter until the threshold of $500 is met .
The final quarter when filing the 940 and annual liability is reviewed:
Employer verifies the actual credit percentage
Adjusts if any difference necessary
Verifies 4th quarter liability
if < $500 then can be paid with the 940 by January 31
if > $500 must be paid separately by January 31
Calculating the credit
Two types of credit scenarios are available:
90% or normal credit- 5.4 %
Additional credit – utilize the lesser rate of the state
Regardless of which option used:
State must have “certified unemployment insurance program”
The credit utilized cannot exceed the 5.4%
90% or normal credit
To claim the full 5.4% credit all deposits due must be made as required by
law with the final payment being no later than when filing the 940.
All State unemployment payments must be made timely… if sent to wrong
state, proof of timely submission will allow the credit.
If payment is late to the state, employer must calculate the liability as:
Annual Liability amount $1600. –Paid $1000 timely -- $600 late
Timely state payment $1000 x 100% = $1000.
Late state payment $600.00 x 90% = $540.00
Total credit on the liability = $1540.00
Additional Credit allowance
If an employer has a state unemployment rate that is less than 5.4 %, the
employer receives a credit for the difference between the FUTA credit
of 5.4% and the state unemployment rate.
Example: state unemployment rate is 3.6%
The credit is 5.4 % - 3.6% = 1.8% x FUTA taxable wages
Credit reductions
State loans for UI
• States that have high unemployment may borrow funds from the federal
agency to assist in benefit payments
• The loans must be repaid by the end of the following year to avoid a credit
reduction
• If the loan is not paid in full by Nov 10th then a .3 % reduction is imposed
new credit rate would be .9%
• Each year a loan remains unpaid the credit reduction increases by .3%
• After Nov 10th the IRS announces the credit reductions for that year and
they are included on Form 940
Form 940
Annual filing form showing the company's FUTA liability
Due date is January 31st following the year of the liabilities
All forms must be signed by an owner, president, vice president,
principal corporate officer, authorized partner or fiduciary.
Delivery must be made by mail, delivery service or hand delivered to
the company’s appropriate IRS office, assigned based on where
the business Is located, or if payment is accompanying the form.
Employers have an automatic 10 day extension for filing their Form 940 as
long as their liability each quarter was paid in full and on time.
Amended 940
Amended 940 –
•Send the corrected form, checking the box labeled “Amended ” (Box ‘a’)
•Attach a statement explaining why the amended return is necessary
•Certification from state for credit allowance or credit reduction
o If overpayment is claimed:
Attach file 843—Claim for Refund and Request for Abatement
o If underpayment situation:
Include check for underpayment amount along with appropriate late filing
percentage
•Amended 940 cannot be electronically filed – must be a paper form sent to IRS
Additional notes :
Successor company – needs to file and check the box labeled “Successor Employer”
Out of Business – need to file, pay and check the box labeled “Final: Business closed or
Not paying wages”
Line by Line
General filing information:
Business name and EIN must be on the top of each page
If paper form must use a 12 point Courier font
Dollars posted to the left and cents to the right of the decimal
Do not use dollar signs or decimals—commas are optional
Amounts on the form may be rounded
If rounding – must be consistent
Do not post 0 (zero) Leave blank
If applicable ensure to check the necessary box
Line by Line
Part 1, Line 1a – State abbreviation
Part 1, Line 1b – Multi-State employer Check box
Must complete Part 1 of Schedule A
Part 1, Line 2 – Credit reduction status check box
Must complete Part 2 of Schedule A
Part 2, Line 3 – Total payments to all employees (all wages)
Part 2, Line 4– Payments exempt from FUTA
If there is an amount on line 4 must check the applicable boxes 4a- 4e
4a-Fringe benefits – this includes qualified moving expenses (talk to AP)
4b- Group Term Life
4c – Retirement / Pension
4d – Dependent care
4e – Other – agriculture, visas, workers comp, etc
Part 2, Line 5—Total of payments made to each employee in excess of $7,000
Part 2, Line 6– Subtotal – Total of exempt payments (lines 4+ 5)
Part 2, Line 7 – Total taxable FUTA wages (lines 3-6)
Part 2, Line 8 – FUTA tax before adjustments - (line 7 x.08)
Line by Line
Part 3, Line 9 – If all FUTA wages paid were exempt from SUTA—
Must pay those wages at full 6.2% or 6.0% ( line 7 x 5.4%)
Part 3, Line 10 – If some FUTA wages paid were exempt from SUTA or paid late
Complete the worksheet and transfer line 7 into line 10 on 940
Part 3, Line 11– If credit reduction applies
Transfer line 3 from Schedule A to Line 11 on the 940
Part 4, Line 12 – Total FUTA taxes after adjustments– (add lines 8-11)
Part 4, Line 13 – FUTA tax deposited for the year
Part 4, Line 14 – Balance due (line 12-13)
Part 4, Line 15 – Overpayment (line 13-12)
Line by Line
Part 5, – Report your FUTA tax liability by quarter only if line 12 is >$500
Part 5, Line 16 – Report the FUTA tax liability for each quarter
This is the actual liability - not deposit amounts
Part 5, Line 17 - Total tax liability for the year (add lines 16a- 16d
Part 6 – May we speak with your third party designee?
Designee may:
Give the IRS any information that is missing from the form
Ask the IRS for any additional information about processing the form
Respond to certain IRS notices—math errors & processing form
Designee may not
Receive refunds
Bind employer to anything
Represent the employer before the IRS in any other matter
Part 7– Sign here--- Must be signed
Paid preparer use only– Vendor that has completed the form
Schedule A
and 940 -V
Schedule A -- Multi-State employer and Credit Reduction Information
Part 1, Line 1– Check box for every state in which you were required to pay SUI tax
Part 2, Line 2 – Credit reduction for specific states – (add lines 2b,2d,2f)
20 credit reduction states in 2011 plus US Virgin Islands
Part 2, Line 3 - Total Credit reduction
940-V– Form 940 Payment Voucher
Utilized only when mailing a check with the 940
Payment can be made via EFTPS
Credit card or Debit card payments can be made with one of three authorized
service providers. Payments may be made via phone or internet. Provider charges a
fee based on amount of payment
Penalties for FUTA
Noncompliance
Late filing of Form 940 – addition to tax
5% if the amount of tax required to be shown on the return (reduced by timely
deposits and credits) for each month or fraction of month return is late
Maximum of 25%
If fraudulent return – amounts increase to 15% up to a maximum of 75%
Failure to pay FUTA tax- addition to tax
.5% if the amount of tax required to be shown on the return( reduced by
credits) for each month or fraction of month payment is late to a max of 25%
An additional .5% on the amount if notice or demand is issued and not
Paid within 21 days (10 days if amount is at least $100,000) up to a max of 25%
If not paid percentage increases to 1% -- if not paid within 10 days- demand
notice issued with one day to pay or levy issued to company signer
Penalties for Noncompliance
Failure to file and pay – the addition for failure to file is reduced by .5% of unpaid tax
assessed if both late deposit and late filing occur
Reasonable cause—Affirmative statement under penalty of perjury that the employer
“exercised ordinary business care and prudence” and could still not pay or file
Accuracy related penalty – Understating the amount or mathematical errors could
result in a 20% penalty on the understated amount
Failure to make timely deposits - Additional late penalty is assessed based on a
four tier scale:
2% if the undeposited amount is paid within 5 days of due date
5% if the undeposited amount is paid within 6-15 days of the due date
10% if the undeposited amount is paid more than 15 days after the due date
15% if the undeposited amount is not paid within 10 days of notice
Beginning in 2011, all federal tax deposits must be made using EFTPS
10% penalty for not paying via EFTPS (not applicable to employers who owe less
than $500)
STATE UNEMPLOYMENT
INSURANCE
State Unemployment Insurance
Applicable for employees not independent contractors
Each state sets their own wage base and rate
Employers conducting business or services in multiple states need to allocate for
unemployment purposes
Four factors when allocating:
1. Are services localized? – one primary location and other state activity is incidental,
temporary
2. Does the employee have a base of operation? - office, reports to corporate office ,
etc
3. Is there a Place of Direction or control? – no localization, no office, results to their
superior where direction will be communicated
4. What is the employees state of residence? – In rare cases where none of the
aforementioned apply, the employee’s residential state is to be utilized.
Reciprocal agreements allow for employers to choose one state for payment when the
employee frequents between the states.
SUTA Taxable Wages
FUTA requires each state’s taxable wage base must at least equal the FUTA taxable
wage base of $7,000.
Types of payments included as taxable wages by the states generally follow the FUTA
taxable wage base. BUT … don’t ASSUME!
States can raise or lower their taxable wage base and will usually notify employers of
changes prior to the beginning of the new tax year.
Contribution Rates & Experience
Rating
Contribution rate is the rate an employer applies to its taxable payroll for each
employee up to a state determined wage base limit
Experience rating is the assessment of the contribution rate based on the
employers average annual taxable wages and unemployment benefits charged
Methods to determine
Experience Rate
Reserve Ratio – primarily used – account assigned for company payments and
reduced based on benefits charged
Reserve Ratio = Unemployment taxes paid – Benefits charged
Average Taxable Payroll
(the HIGHER the ratio, the lower the tax rate)
Benefit Ratio- 2nd most used formula –
Benefit Ratio =
Benefits charged
Total taxable payroll
(the LOWER the ratio, the lower the tax rate)
Methods to determine
Experience Rate
Benefit wage ratio method – Used in Delaware and Oklahoma
Benefit wage ratio = Benefit wages paid
Total taxable payroll
(the LOWER the ratio, the lower the tax rate)
Payroll Stabilization – Alaska only state to utilize
Fluctuation in payroll from quarter to quarter either increases or
decreases the rate
Surcharges may be assessed if the state is experiencing high
unemployment, or has federal loan assistance. The surcharge may or may
not play a factor when determining state credit against FUTA tax liability,
depending on the reason it was established.
New Employer Rate - employer’s industry may be a factor in some states
SUTA Dumping Prevention Act 2004
Law created to eliminate the manipulation of state unemployment rates to achieve
a lower employer tax rate (“dumping” the higher rate)
Law mandated each state enact state laws providing for the four factors:
•Mandatory transfers– Unemployment experience must be transferred between
common ownership companies
•Prohibited transfers—new company cannot utilize the lower rate of selling
company, a new company rate must be provided
•Penalties for SUTA Dumping– must have meaningful civil and criminal penalties
for violating the transfer requirements
•Procedures for identifying SUTA Dumping must be established by each state
Failure to have these controls will prohibit the state to be certified under the FUTA
Act.
Noteworthy SUTA Laws
Non- profit and public sector generally follow one of two options
•Direct reimbursement—Employer reimburses the state directly for any
unemployment benefits charged to it
•Choose to become experience rated (rare)
Employee contributions
Three states have plans that require employee contributions
Pennsylvania – Alaska - New Jersey
Voluntary Contributions - 27 states allow additional payments into the fund
account to lower the employer’s tax rate. States have strict guidelines and
timetables and not all employers are eligible.
Joint or Combined Accounts
When employers have more than one subsidiary in a state with separate
FEIN’s, they may want to look at joining the subsidiaries for unemployment
insurance purposes. With the right mixture of good & bad unemployment
experience, combining accounts may save the employer money.
Not all states offer the joint account option
The states that do allow the joint account option have very strict guidelines
Unemployment Benefit Process
State Dept of Labor – places guidelines and conditions around granting
Unemployment Benefits
DOL issued final ruling in 2007 to limit state’s payment of unemployment stating
individual must be “able and available to work”
In most states, the “base period” is the first 4 calendar quarters out of the 5
preceding the quarter during which the employee first filed the
claim for benefits
Balanced Budget Act of 1997 included a provision that guarantees states
the discretion to administer base periods as they see fit
Normal allowance is 26 weeks – Federal government may grant an emergency
extension during periods of high unemployment
Unemployment Benefit Process
American Recovery and Reinvestment Act of 2009 – states were offered federal
incentive funding thru 2011 if they adopted ABP (Alternative Base Period) which
looks at the immediately preceding four quarters of earnings
Incentive funding was also made available for states that enacted at least 2 of the
following 4 provisions:
1) Coverage for part time workers
2) Coverage for workers who quit because of compelling family reasons
3) Coverage for workers in training programs
4) Dependent allowances
Part-time employees may qualify for benefits – employees whose hours are reduced
are eligible as long as they are not earning more than the weekly benefit amount
Other payments may reduce benefits – holiday, vacation, dismissal or severance pay
may delay a worker’s unemployment benefits in certain states
Unemployment Benefit Process
If employee worked for more than one employer during the base period, states
can choose between 4 different methods to allocate benefit charges
•Percentage of based period wages paid to claimant
•Claimant’s most recent employer receives full charge
•Employer who paid claimant the most wages during the base period receives full
charge
•Most recent base period employer charged first (up to a maximum amount), then
next most recent, etc
Auditing and Challenging
Benefit Claims
One way that companies can lower their expenditures for unemployment is to
conduct account auditing and challenge claims in efforts to alleviate some
expenses.
Periodic Statements – provided by each state to the Employer should be audited
regularly for errors and duplications
Challenging benefit claims – Employer should challenge claims for which they
believe the former employee is ineligible and respond to all notices and requests
for information from the state
Reporting Requirements
Each state requires employers to submit quarterly reports with some or all of the
following information:
•Total wages paid
•Taxable wages paid
•Nontaxable wages paid
•Number of employees each month
•Gross wages for each employee
•Taxable/Nontaxable wages breakdown for each employee
•Number of weeks worked by each employee
Many states require employers to file their quarterly wage information on some type
of magnetic media – tape, cartridge, or diskette – or electronically file over the
internet.
Multiple Worksite Reporting
Additional mandatory quarterly filing when an employer has multiple worksites
MWR (Multiple Worksite Reporting) breaks down the employment and wages by
locality and industry
Filed with the State Employment Security agency
The information is used by the Federal Bureau of Labor Statistics (BLS)
Mandatory vs. Voluntary reporting – 27 states have mandatory Multiple Worksite
Reporting requirements. Standardization of the form has streamlined
the process.
A mandatory MWR employer :
•Uses one unemployment insurance account number for all its employees
•Has more than one worksite, or conducts multiple activities
•Has a total of at least 10 employees at all its secondary locations
Magnetic filing and internet options can be obtained at the Bureau of Labor Statistics
website and publications.
State Disability Insurance
California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico have State
Disability Insurance programs to provide benefits to employees who are temporarily
disabled by nonwork-related illness or injury
Paid family leave in California – began in 2004
Family leave insurance in New Jersey – benefits available as of July 1, 2009
Contributions – SDI is funded by both the employer and the employee
Look for many changes for 2013