Payroll Accounting 2010
Bernard J. Bieg and Judith A. Toland
CHAPTER 5
UNEMPLOYMENT
COMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MS
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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 SUTA
 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!
Who is Covered Under FUTA

FUTA originated through passage of SSA of 1935
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Employers are liable for this tax if
 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
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
Employees Covered Under FUTA

General rule is everyone is considered an EE if
common-law relationship exists
 Also specifically includes
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
Who is Covered Under SUTA
 Employees generally covered under SUTA if
covered under FUTA
 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
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)
 Where is work
localized (meaning where is work
primarily performed)

This is most compelling criterion - most states assign
coverage if work is primarily performed within that state
 Where is operational
base (management, business
records)
 Where are operations directed (state where control exists)
 Employee’s residence
Reciprocal Arrangements
 If
factors from prior slide do not yield appropriate
answer, Interstate Reciprocal Coverage
Arrangement may be fashioned
 Employer covers all worker’s services in one state, then
all affected states must approve
 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
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 on pages 5.12 - 5.14)
 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 – 5.8
Specifically Exempt Wages for FUTA
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 5.8
FUTA Rates
 FUTA rate =
6.2% of first $7,000 of gross wages for
each employee per year
 5.4% credit against FUTA (allowed for SUTA taxes)*
Therefore gross
less
6.2%
5.4% credit
= .8% net FUTA
*Even if experience rating allows ER to pay a lower rate than
5.4%
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)
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SUTA Laws & Rates
Each employer’s rate based upon experience
rating (see next slide)
 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
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SUTA Rates
 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
– this means employer has built up a balance in reserve
 Some states require employees to contribute to
SUTA
 Some states reduce rates if employers make
voluntary contributions to state fund
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
 Can e-file after submit electronic IRS letter of
application
 A final return must be filed in year company ceases
doing business
FUTA Reporting Requirements
940 has multiple sections
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Part 1
Part 2
Part 3
Part 4
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Did company pay SUTA to one state?
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Calculate FUTA tax before adjustments
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Determine adjustments
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Compare adjusted FUTA tax to deposits and
calculated balance due or overpayment
Part 5 –
Report FUTA liability
Parts 6 – 8 – 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
FUTA Deposit Overview
 Deposit quarterly -
but only if cumulatively over
$500
 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
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 Form 8109 coupon and deposit with an
authorized depository
 Or if
employer deposits other federal payroll taxes
electronically, must deposit FUTA electronically
SUTA Deposit and 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 x taxable SUTA wages
 Amount of required payment
 Usually includes wage information report per employee
Additional SUTA Information Reports
 Forms vary by state but may include
 Status Reports
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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
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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