Bernard J. Bieg and Judith A. Toland
PAYROLL
ACCOUNTING 2014
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UNEMPLOYMENT
COMPENSATION TAXES
Chapter 5
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Learning Objectives
Describe basic requirements for
classification under Federal Unemployment
Tax Act (FUTA)
2. Define taxable wages under FUTA
3. Compute FUTA and credit against it
4. Describe how experience-rating system is
used in determining state unemployment
compensation (SUTA)
5. Complete reports required by FUTA
6. Describe types of information reports
required under SUTA
1.
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FUTA and SUTA

FUTA
◦ 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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service or otherwise on a password-protected website for classroom use.
FUTA and SUTA (cont.)

SUTA
◦ State Unemployment Tax Act
 Different law in each state
 Funds used to pay benefits and administer program
at individual state’s level
 In current economic situation, unemployment
insurance programs are being stretched very thin!
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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 512 and 5-13))

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service or otherwise on a password-protected website for classroom use.
Taxable Wages for FUTA/SUTA
(cont.)

Wages include
◦
◦
◦
◦
◦
Bonuses, advances, severance pay
Stock compensation - fair market value
Tips
Retroactive wage increases
Complete list of taxable wages found on
pages 5-7 and 5-8
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service or otherwise on a password-protected website for classroom use.
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)*

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service or otherwise on a password-protected website for classroom use.
FUTA Rates (cont.)
Therefore gross
 6.0% less 5.4% credit
= 0.6% net FUTA

 *Even if experience rating allows employer to pay a
lower rate than 5.4%
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service or otherwise on a password-protected website for classroom use.
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
◦ Note: even if employer pays into more than
one fund, credit still limited to 5.4%
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service or otherwise on a password-protected website for classroom use.
Credits Against FUTA Tax
(cont.)
◦ 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 (0.3% per year beginning the
second year after the advance)
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service or otherwise on a password-protected website for classroom use.
SUTA Laws & Rates
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

LO-4
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service or otherwise on a password-protected website for classroom use.
SUTA Laws & Rates (cont.)
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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service or otherwise on a password-protected website for classroom use.
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 – thereafter IRS will
send preaddressed Form 940

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service or otherwise on a password-protected website for classroom use.
How to File Form 940 (cont.)
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

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service or otherwise on a password-protected website for classroom use.
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

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service or otherwise on a password-protected website for classroom use.
FUTA Deposit Overview (cont.)
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


*If falls on Saturday, Sunday or legal
holiday, have until following business day
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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

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How Much FUTA to Deposit
(cont.)
Use voucher 940V
 Penalties apply for failing to file 940
return, pay
 FUTA taxes when due and/or make timely
deposits

LO-5
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service or otherwise on a password-protected website for classroom use.
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

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service or otherwise on a password-protected website for classroom use.
SUTA Deposit & Reporting
Overview (cont.)

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
LO-6
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service or otherwise on a password-protected website for classroom use.