CHAPTER 5CHAPTER 5

UNEMPLOYMENTUNEMPLOYMENTCOMPENSATIONCOMPENSATION

TAXESTAXES

Developed by Lisa Swallow, CPA CMA MS

FUTA and SUTAFUTA and SUTA

FUTA Federal Unemployment Tax Act

Employer tax required for administration of federal and state unemployment insurance

SUTA State Unemployment Tax Acts

Different for each stateFunds used to pay benefits and administer

program at state level

Who Pays FUTAWho Pays FUTA

FUTA passed to comply with SSA of 1935Employers are liable for this tax if they:

Pay $1500 of wages in any quarter in current or prior year

Employ one or more person in one day of each of 20 weeks in current or prior year

**Then liable for FUTA for entire year** Employees include

part time, temps and regular workers workers on vacation/sick leave

Services Covered under FUTAServices Covered under FUTA

General rule is everyone is EE if common-law relationships exists (with specific exceptions as follows)

Partners Directors Independent contractors Kids under 21 working for parents RRTA or governmental employees Nonprofits (church, educational, etc.) Complete list on page 5-4

SUTA and Interstate EESUTA and Interstate EE

Generally covered under SUTA if covered under FUTA

Multi-state employees - which state does ER pay SUTA to (apply following in order)

where is work localized (work primarily performed)where is the operational base (management, business

records)where are operations directed (state where control

exists)employee’s place of residence

If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned (in most states)

Taxable Wages for Taxable Wages for FUTA/SUTAFUTA/SUTA

Taxable FUTA wage base caps at $7000 per employee per year

Taxable SUTA wage base caps at different amount in each state

Wages include: bonuses, advances, severance pay stock compensation (FMV) tips complete list in chapter 5

Specifically Exempt Wages Specifically Exempt Wages for FUTAfor FUTA

Workers compensation payments Retirement pay Educational assistance payments if

part of nondiscriminatory plan Meals and lodging, if for ER’s benefit Strike benefits Complete list in chapter 5

FUTA RatesFUTA Rates

FUTA = 6.2% of first $7000 of gross wages for each employee per year

5.4% credit against FUTA made for SUTATherefore gross = 6.2% - 5.4% credit = .8% net

To get 5.4% credit must have: Made SUTA contributions by due date of form 940 Been located in state that is not in default on their Title XII advances

(credit is reduced .3% per year beginning the second year after the advance)

Title XII is the act that allows states to borrow unemployment compensation funds from federal government

FUTA Deposit and Reporting FUTA Deposit and Reporting OverviewOverview

Deposit quarterly (but only if cumulatively over $100)

1/1-3/31 deposit by 4/304/1-6/30 deposit by 7/317/1-9/30 deposit by 10/3110/1-12/31 deposit by 1/31

File annuallyForm 940 due by 1/31 of following year

How Much FUTA How Much FUTA to Depositto Deposit

If $100 or more, must depositIf less, can wait and add to next quarter,

then if it’s $100 or more, must depositIf never gets over $100, pay with form 940

or 940-EZ at year endUse 8109 coupon and deposit with

Federal Reserve Bank or deposit electronically

FUTA Reporting FUTA Reporting RequirementsRequirements

Form 940 or 940-EZ by 1/31 next year Unless only household employees, then can file

Schedule H with the individual 1040 tax return Can file form 940-EZ if:

Paid SUTA timely Paid SUTA to one state State is not in Title XII default SUTA taxable wages = FUTA taxable wages

Can amend (check appropriate box above Part I) Upon cessation of business, check “final return” box

SUTA Deposit and Reporting SUTA Deposit and Reporting OverviewOverview

SUTA requirements vary widely by state In some states, EE withholding is required for

SUTA, in that case EE and ER SUTA deposited together

SUTA quarterly contribution report generally shows: each employee’s gross wages and taxable

SUTA wages (wage information) contribution rate x taxable SUTA wages amount of required payment

Additional SUTA Additional SUTA Information ReportsInformation Reports

Status reports initial registration with state as employer liable

for SUTA

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

Unemployment Unemployment Compensation BenefitsCompensation Benefits

Each state individually qualifies and pays unemployed workers Claimant must meet strict requirements

including: ability and availability to work proof of actively seeking work

Varying minimum and maximum amounts (average benefit = approximately 50% of gross wages)

Some states distribute additional amounts for each dependent the worker has in his/her home

Unemployment Unemployment Compensation Benefits Compensation Benefits

(continued)(continued)Benefits in special situations

Benefits continue past “normal” 26 week period if unemployed due to major disaster (up to one year after disaster declaration)

Federal employees may receive benefits under state law in which EE last worked

Unemployed military personnel may receive benefits from the state in which most recently separated from active service