Payroll Accounting 2009
Bernard J. Bieg and Judith A. Toland
UNEMPLOYMENT
COMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MS
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FUTA
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Federal Unemployment Tax Act
 Federal law that imposes an employer tax
 Required for administration of federal and state
unemployment insurance programs
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
FUTA originated through passage of SSA of 1935
 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
 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
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If employer owes FUTA – liable for entire year!!
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Employees include
Part-time, temps and regular workers
 Workers on vacation/sick leave
 Agricultural employees (special rules)
 Household employer
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General rule is everyone is considered an EE if
common-law relationship exists
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Also included
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Drivers who distribute food/beverage or deliver laundry
Traveling salespeople (specific situations)
Specific exceptions as follows
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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
Nonprofits (church, educational, etc.)
Complete list on page 5.4
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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
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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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
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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
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Each employer’s rate based upon
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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
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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
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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
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 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
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FUTA = 6.2% of first $7,000 of gross wages for
each employee per year
 5.4% credit against FUTA (allowed for SUTA
taxes)*
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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%
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To get full 5.4% credit must have:
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Made SUTA contributions on timely basis
 On or before due date for filing
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Been located in a state that is not in default on their Title
XII advances
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Title XII of the Social Security Act lends funds to states
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Provides unemployment compensation funds from federal
government
Credit is reduced (.3% per year beginning the second year after
the advance)
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Deposit quarterly - but only if cumulatively over $500
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Due dates are as follows*
1/1 - 3/31
4/1 - 6/30
7/1 - 9/30
10/1 - 12/31
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deposit by 4/30
deposit by 7/31
deposit by 10/31
deposit by 1/31
Form 940 due by 1/31 of following year
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Filed annually
*If falls on Saturday, Sunday or legal holiday, have until following business day
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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
940 has multiple sections
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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
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Form 940 due by January 31 of next year
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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
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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
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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
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Forms vary by state but may include:
Status Reports
 Initial registration with state as employer liable for
SUTA
 Wage Information Report
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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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