Mary Kazmierczak, CPP
Rachel Brooks, CPP
• 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) incl. 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 incl. 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 2009
• 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
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 %
Maximum paid $7.000 x .8% = $56.00 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 wages by .058% --up to $7,000 wage base limit or $56.00
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 then a .3 % reduction is imposed new credit
rate to be 1.1%.
• The credit reduction can be avoided should certain criteria be met as of
November 10:
– Solvency of the unemployment system
– Company ability to complete the payment timely
– No further necessity to borrow
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
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 office , assigned based on where the business
Is located, of if payment is accompanying the form.
Amended 940
Amended 940 –
Resend the corrected form with the box checked that is labeled “Amended ”
Statement of reason for amendment
Certification from state for credit allowance or credit reduction
If overpayment is claimed:
Attach file 843—Claim for Refund and Request for Abatement
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 point
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 amount on line 4 must check the applicable boxes 40a- 4e
4a-Fringe benefits
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 $7,000
Part 2, Line 6– Subtotal –Total of exempt payments (line 4+ 5)
Part 2, Line 7 – Total taxable FUTA wages (line 3-6)
Part2, Line 8 – FUTA tax before adjustments- (Line7 x.08)
Line by Line
Part 3, Line 9 – If all FUTA wages paid were exempt from SUI—
Must pay those wages at full 6.2% ( line 7 x 5.4%)
Part 3, Line 10 –If some FUTA wages paid were exempt from SUI 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)
Part4, 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 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
Nor represent the employer before the IRS
Part 7– Sign here--- Must be signed
Paid preparer’s use only– Vendor that has completed the form
Schedule A
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 – Total Credit reduction – (add lines 2b,2d,2f,2h,2j)
There are no credit reduction states for 2008 thus this area need not be completed
940-V– Form 940 Payment Voucher
Utilized only when making payment with the 940.
Credit card payments or wire amounts can be made with one of two authorized
service providers, that have obtained prior approval.
Payments can be made 24/7.
Payments 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 – an additional .5%
Assessed if both late deposit and late filing
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 result in a
20% penalty on the difference of the error
Failure to make timely deposits- if not deemed willful neglect or approved as
reasonable cause.. 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 undepositted 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% of the undeposited amount in not paid within 10 days of notice
STATE UNEMPLOYMENT
INSURANCE
State Unemployment Insurance
Applicable for employees not independent contractors
Each state sets there 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.
Contribution Rates & Experience
Rating
Contribution rate is the rate a 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
Benefit Ratio- 2nd most used formula Benefit Ratio = Benefits charged / Total taxable payroll
Benefit wage ratio method – Used in Delaware an Oklahoma
Benefit wage ratio = Benefit wages paid / Total taxable payroll
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 depending of the reason it was established.
SUTA Dumping Prevention Act 2004
Law created to eliminate the Shell scam of creating a bogus company and
transferring its employees to the newly created company, with a lower tax rate,
and thus paying less UI and allowing its company’s higher rate to decrease.
Law mandated each state put in place processes around the below four factors:
Failure to have these controls will prohibit the state to be certified under the FUTA
Act.
•Mandatory transfers– transfer between co-companies to benefit on UI
•Prohibited transfers—new company cannot utilize the lower rate, a new company
rate must be provided.
•Penalties for SUTA Dumping– must have meaningful civil and criminal penalties
•Procedures for identifying and processing SUTA Dumping
Noteworthy SUI
Non- profit and public sector generally follow one of two options
•Direct reimbursement—Employer reimburses the state directly for any
unemployment benefits
•Choose to become experience rated (rare)
Employee contributions:
Three states have plans that enforce a minute amount be contributed from the
employee
Pennsylvania– Alaska--- New Jersey ( PAN)
Voluntary Contributions- 27 states can make additional payments into the fund
account– States have strict guidelines and timetables
Unemployment Benefit Process
State Dept of Labor– places guidelines and conditions around granting
Unemployment Benefits
Know that the terminated employees wages earned In the base period are the
Factors utilized in calculation the benefit.
Part time employees can get benefits.
Normal allowance is 26 weeks– Stimulus changed and extended the period
Very interesting to understand but no in depth necessary for testing.
Auditing and Challenging
Benefit Claims
One means that company’s can lower their expenditures for unemployment :
Conduct account auditing and challenge claims in efforts to alleviate some
expenses.
Heartless. .. But businesses do it an even pay for services to be the bully.
Multiple Worksite Reporting
Additional mandatory quarterly filing when an employer has multiple worksites.
MWR breaks down the employment and wages by locality and industry.
Filed to the State Employment Security agency.
The Employment security agency in turn must file it with the Federal Bureau of Labor
Mandatory vs. Voluntary reporting– this references the information that must be
contained within the MWR to states vs. Involuntary where an employer reports to BLS.
Standardization of the form has streamlined the process.
Mandatory MWR employers :
Uses one unemployment insurance account number for all its employees
Has more than on 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 BLS website and publications
Look for many changes for 2010
Thank you