Payroll Accounting 2013
Bernard J. Bieg and Judith A. Toland
CHAPTER 5
UNEMPLOYMENT
COMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MS
Learning Objectives
• Describe basic requirements for classification under
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Federal Unemployment Tax Act (FUTA)
Define taxable wages under FUTA
Compute FUTA and credit against it
Describe how experience-rating system is used in
determining state unemployment compensation (SUTA)
Complete reports required by FUTA
Describe types of information reports required under
SUTA
FUTA and SUTA
• FUTA
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Federal Unemployment Tax Act
Passed as part of Social Security Act of 1935
• Federal law that imposes an employer tax
• Required for administration of federal and state unemployment
insurance programs
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• SUTA
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State Unemployment Tax Act
Different law in each state
• Funds used to pay benefits and administer program at individual
state’s level
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In current economic situation, unemployment
insurance programs are being stretched very thin!
LO-1
Who is Covered Under FUTA
• Employers are liable for this tax if
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Pay $1,500 or more of wages in any quarter in current or prior year
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Employ one or more persons, on one day in each of 20 weeks in current or
prior year
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Special rules for agricultural and household employers
If employer owes FUTA – liable for entire year!!
• Employees include
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Part-time, temps and regular workers
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Workers on vacation/sick leave
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Agricultural employees (special rules)
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Household employees
LO-1
Employees Covered Under FUTA
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General rule is everyone is considered an EE if
common-law relationship exists
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Also specifically includes
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Drivers who distribute food/beverage or deliver laundry
Traveling salespeople (certain situations)
Specific exceptions include
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Partners
Directors
Independent contractors
Home workers
Full-time life insurance salespeople
Children under 21 working for parents
RRTA or governmental employees
Complete list on page 5-4
LO-1
Who is Covered Under SUTA
• Employees generally covered under SUTA if covered
under FUTA
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Likewise employers specifically excluded under federal law
generally excluded under state laws
• Many states apply “ABC” test for SUTA exclusion
(meaning all of following tests must be met):
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
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LO-1
Interstate Employees and SUTA
• With multi-state employees, sometimes a question arises as
to which state employer is liable for SUTA (to decide - apply
following in order)
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Where is work localized (meaning where is work primarily
performed)
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This is most compelling criterion - most states assign coverage if work is
primarily performed within that state
Where is operational base located (management, business
records)
• Where are operations directed (state where control exists)
• Employee’s residence
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LO-1
Reciprocal Arrangements
• If factors from prior slide do not yield appropriate
answer, Interstate Reciprocal Coverage
Arrangement may be utilized
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State may enter into arrangements under which employer
may elect coverage of the employee in one state
Benefit to employer as he/she can chose state in which all
services of interstate workers are to be covered
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Based on most advantageous wage base and contribution rate
LO-1
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
(Figure 5-1 (pages 5-12 and 5-13) WA wage base cap at $39,800/year
for 2013)
• Wages include
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Bonuses, advances, severance pay
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Stock compensation - fair market value
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Tips
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Retroactive wage increases
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Complete list of taxable wages found on pages 5-7 and 5-8
LO-2
Specifically Exempt Wages for FUTA
Advances or reimbursement of business expenses
• Retirement pay
• Educational assistance payments
• Meals and lodging if for employer’s benefit
• Strike benefits
• Complete list on page 5-8
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LO-2
FUTA Rates
• FUTA rate = 6.0% of first $7,000 of gross wages for each
employee per year
• 5.4% credit against FUTA (allowed for SUTA taxes)*
Therefore gross
6.0%
less 5.4% credit
= .6% net FUTA
*Even if experience rating allows employer
to pay a lower rate than 5.4%
LO-3
Credits Against FUTA Tax
• To get full 5.4% SUTA credit, employer 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 so they may
provide unemployment compensation funds from federal government
• Credit is reduced (.3% per year beginning the second year after the
advance – for example, Michigan subject to additional rate if loans not
repaid by 11/10/12)
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Note: even if employer pays into more than
one fund, credit still limited to 5.4%
LO-3
FUTA Tax Rate
 Assume the taxable wage of $39,000 for the year The
wages actually paid to employees in 2012 in excess of
$7,000 each amounted to $26,000.
Total amt. charged to wages
Less:
Wages paid in excess of $7,000 limit
Total Taxable Wages
Rate of Tax
Amount of gross FUTA tax
Total Tax Credit ( 13,000 x 5.4%)
Amount of Net FUTA tax (13,000 x .6%)
$39,000.00
($26,000.00)
$13,000.00
x 6.0%
$ 780.00
(702.00)
$ 78.00
FUTA Tax Rate
 Assume the Mirage Corp has a $70,000 federal and state
taxable payroll and earned a reduced state tax rate of 4%.
If Mirage was late in making the deposit, the FUTA tax
calculation would be as follows:
Gross FUTA tax (70,000 x .06)
$ 4,200
Less 90% credit for state taxes paid late (70K x 4% x 90%) 2,520
Less additional credit for state tax
if rate were 5.4% (70,000 x (5.4 – 4))
980
Total Credit
$ 3,500
Net FUTA Tax
$ 700
If Mirage had paid on time FUTA would be ($70,000 x .006) = $420 a saving of
$280
Problems
5
- 2A, 5 - 6A, 5 - 7A
SUTA Laws & Rates
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Each employer’s rate based upon experience rating (see
next slide)
New employer’s pay an initial contribution rate that
applies for specific period of time
Some states utilize reserve-ratio formula to lower
contributions based on low risk of unemployment
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
LO-4
SUTA Rates
• Experience rating reflects stability of employer’s employment
history
Lower unemployment rate reflected in lower rate
• Most common formula is reserve-ratio formula
• Positive balance employers will experience lower tax rate – this means
employer has built up a balance in reserve
• Negative balance employers will experience higher tax rates
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• Some states require employees to contribute to SUTA
• Some states reduce rates if employers make voluntary
contributions to state fund – this increases reserve account
and thereby lowers future SUTA rate
LO-4
Problems
 5 – 9A, 5 – 10A, 5 – 14A
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
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employer or have SUTA credit reduced
File with IRS District Center in which business is located –
thereafter IRS will send preaddressed Form 940
Can e-file after submit electronic IRS letter of application
When filing a corrected form, mark the “Amended” box and
include explanation as to why an amended return is filed
A final return must be filed in year company ceases doing
business
LO-5
FUTA Reporting Requirements
940 has multiple sections
Part 1
Part 2
Part 3
Part 4
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Part 5 –
Parts 6 – 7
Information about SUTA payments
Calculate FUTA tax before adjustments
Determine adjustments
Compare adjusted FUTA tax to deposits and
calculated balance due or overpayment
Report FUTA liability
Delineate 3rd 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
File Schedule A to accompany 940 if multi-state ER or reduced credit
LO-5
FUTA Deposit Overview
• Deposit quarterly - but only if cumulatively over $500
• Required to deposit federal taxes electronically unless employer has
$2,500 or less in quarterly tax liabilities
Due dates are as follows*
1/1 - 3/31
4/1 - 6/30
7/1 - 9/30
10/1 - 12/31
deposit by 4/30
deposit by 7/31
deposit by 10/31
deposit by 1/31
*If falls on Saturday, Sunday or legal holiday,
have until following business day
LO-5
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 voucher 940V
Penalties apply for failing to file 940 return, pay
FUTA taxes when due and/or make timely deposits
LO-5
SUTA Deposit & 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 the
following
Each employee’s gross wages and taxable SUTA wages (wage
information)
• Contribution rate multiplied by taxable SUTA wages
• Amount of required payment
• Usually includes wage information report per employee
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LO-6
Additional SUTA Information Reports
Forms vary by state but may include
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Status Reports
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Wage Information Report
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Earnings per employee and SS# are reported
Separation Reports
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Initial registration with state as employer liable for SUTA
Informs state of separated employees - aids in determination of eligibility
for benefits
Partial Unemployment Notices
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Notifies state and the employees who have had their hours cut back to
part-time of potential eligibility for partial unemployment benefits
In an increasing number of states, electronic filing of
reports and payment of tax are required
LO-6
Problem
 5 – 16 A