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CHAPTER 5

CHAPTER 5. Payroll Accounting 2006 Bernard J. Bieg. UNEMPLOYMENT COMPENSATION TAXES . Developed by Lisa Swallow, CPA CMA MS. FUTA and SUTA. FUTA Federal Unemployment Tax Act Employer tax required for administration of federal and state unemployment insurance programs SUTA

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CHAPTER 5

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  1. CHAPTER 5 Payroll Accounting 2006 Bernard J. Bieg UNEMPLOYMENT COMPENSATION TAXES Developed by Lisa Swallow, CPA CMA MS

  2. FUTA and SUTA • FUTA • Federal Unemployment Tax Act • Employer tax required for administration of federal and state unemployment insurance programs • SUTA • State Unemployment Tax Acts • Different for each state • Funds used to pay benefits and administer program at individual state’s level

  3. Who is Covered under FUTA • FUTA passed to comply with SSA of 1935 • Employers are liable for this tax if • Pay $1,500 of wages in anyquarter in current or prior year • Employ one or more persons, in one day in 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

  4. Employees Covered under FUTA • General rule is everyone is considered an EE if common-law relationships exists • Also included • Drivers who distribute food/beverage • Traveling salespeople [specific situations] • Specific exceptions as follows • Partners • Directors • Independent contractors • Children under 21 working for parents • RRTA or governmental employees • Nonprofits (church, educational, etc.) • Complete list on page 5-6

  5. Who is Covered under SUTA • Employees generally covered under SUTA if covered under FUTA • Many states apply “ABC” test for SUTA exclusion • Is the person free from control/direction • Is work performed outside usual course of business • Is person usually engaged in an independent trade or business

  6. Interstate Employees and SUTA • Multi-state employees: issue is to which state does ER 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 exist) • employee’s residence • If above do not yield appropriate answer, Interstate Reciprocal Coverage Arrangement may be fashioned (in most states) • Americans working overseas for American company are covered

  7. 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 (pp 5.13 - 5.15) • Wages include: • bonuses, advances, severance pay • stock compensation • fair market value • tips • complete list (pp 5.8 - 5.9)

  8. Specifically Exempt Wages for FUTA • Worker’s compensation payments • 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

  9. FUTA Rates • FUTA = 6.2% of first $7,000 of gross wages for each employee per year • .2% surcharge expires in 2007 • 5.4% credit against FUTA made for SUTA Therefore gross = 6.2% - 5.4% credit = .8% net • To get 5.4% credit must have: • Made SUTA contributions on timely basis • Been located in a 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

  10. FUTA Deposit and Reporting Overview • Deposit quarterly • But only if cumulatively over $100 • 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 • Form 940 due by 1/31 of following year • Filed annually *If falls on Saturday, Sunday or legal holiday, have until following business day

  11. FUTA Reporting Requirements • Form 940 due by 1/31 next year • Revised 2005 – combines 940 and 940-EZ • Only need to complete specific sections of 940 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

  12. How Much FUTA to Deposit • If $500 or more, must deposit • 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

  13. SUTA Deposit and Reporting Overview • SUTA requirements vary widely by state • In some states, EE withholding is required for SUTA • in that case both SUTA for both EE and ER 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 • usually includes wage information report per employee

  14. Additional SUTA Information 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

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