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Unemployment Taxes

This article explains the basics of unemployment taxes, specifically the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA), and how they are paid by employers. It also discusses the calculation of FUTA tax, credit reduction states, taxable wages, and SUTA rates.

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Unemployment Taxes

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  1. Unemployment Taxes Federal Unemployment Tax Act - FUTA State Unemployment Tax Act - SUTA • Both taxes are paid by the Employer, not the Employee FYI… This is true in Illinois. Some states may have employee contribution. • FUTA – monies collected pays for the Federal & State administration of unemployment programs FUTA covers the costs of administering the UI and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides or a fund from which states may borrow, if necessary, to pay benefits. • SUTA – monies collected are used for payments directly to the unemployed

  2. Unemployment Taxes FUTA Employer (…is the employer FUTA-eligible?) • Employer pays tax for whole year if one of the following occurred during current or preceding year: • wages >= $1,500 during any quarter • employed at least one person for 20 weeks or more • need not be consecutive weeks • need not be the same employee(s) • Agricultural employers, under certain conditions • Household employer paying $1,000 or more during any quarter for household services A household worker is an employee who performs domestic services in a private home. Examples of household employees are: babysitters, caretakers, cleaning people, drivers, nannies, health aides, yard workers and private nurses.

  3. Title XII allows states to borrow unemployment compensation funds from federal government. Unemployment Taxes FUTA (cont.) From the 2016 Form 940 Instructions: Credit reduction state. A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a “credit reduction state.” The Department of Labor determines these states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940. For 2016, there are credit reduction states. If you paid any wages that are subject to the unemployment compensation laws of a credit reduction state, your credit against federal unemployment tax will be reduced based on the credit reduction rate for that credit reduction state. Use Schedule A (Form 940), to figure the credit reduction. For more information, see the Schedule A (Form 940) instructions or visit IRS.gov. (2016 Schedule A shows Illinois with no (0.000) credit reduction.) Wages and Taxes • Only the first $7,000 per employee is taxable • fyi… Wages “grid” from Publication 15, pgs. 37-41 • fyi…Fringe Benefits “grid” from Publication 15-B, pg. 6 • The net FUTA rate is 0.6% • the actual calculation is 6.0%, less… • a credit of 5.4%. • The credit is available if state unemployment (SUTA) taxes are paid on time. • The credit can be reduced for late SUTA payments! • The credit can also be reduced if in a state that is in default on their Title XII advances. 2016 Schedule A • Therefore, the maximum FUTA tax per employee is: $7,000 x 0.006 = $42.

  4. Unemployment Taxes FUTA (cont.) Payments & Reports • If accumulated liability exceeds $500 at the end of any quarter, then employer must deposit electronically by end of following month. X FYI… Form 8109 is no longer used to deposit taxes via check.

  5. Unemployment Taxes FUTA (cont.) Payments & Reports • If accumulated liability exceeds $500 at the end of any quarter, then employer must deposit electronically by end of following month. • Annual Report - Form 940 • due January 31st Form 940 - EXAMPLE Form 940 Schedule A - EXAMPLE

  6. Unemployment Taxes SUTA Employer • Interstate Employee – what state is given the contribution (tax)? • Four Tests determine the State (in order of application): Place where the work is localized. Location of base of operations. Location from which operations are directed or controlled. Location of employee’s residence.

  7. Unemployment Taxes SUTA (cont.) Wages and Taxes • Illinois - first $12,960 (for 2017) per employee is taxable. SUTA Rate History: 2002 – 4.0% (6.8%) 2003 – 5.3% (7.2%) 2004 – 6.8% (8.6%) 2005 – 9.8% (9.8%) 2006 – 8.9% (8.9%) 2007 – 8.2% (8.2%) 2008 – 4.5% (7.2%) 2009 – 3.4% (6.8%) 2010 – 2.7% (7.2%) 2011 – 8.4% (8.4%) 2012 – 9.45% (9.45%) 2013 – 8.95% (8.95%) 2014 – 1.75% (8.55%) 2015 – 2.05% (8.15%) 2016 – 2.65% (7.75%) 2017 – ???% (7.35%) • The rate for a company varies between the minimum and maximum set for the year (0.55% - 7.35% represents min/max for 2015). • based on experience rating. • new employer files a UI-1 form within 30 days – new rate is determined, but will be at least 3.9%. • maximum rate of 5.4% for small employer (“small employer” pay < $50K in wages/qtr). IDES Rates - History Arens’ SUTA Rate Announcement for 2012 Arens’ SUTA Rate Announcement for 2014 Arens’ SUTA Rate Announcement for 2015 Arens’ SUTA Rate Announcement for 2016 SUTA Taxable Wage Bases for All States

  8. Unemployment Taxes SUTA (cont.) Payments & Reports • Form UI-3/40 (Wage Report) filed quarterly, even if zero wages. • Wage reports and payments due by end of month following each calendar quarter. • Large employers (250+ employees) must file electronically. UI-3/40 - Example.pdf

  9. Unemployment Taxes SUTA (cont.) FYI…. SUTA Dumping • Effective January 1, 2006, if an entity transfers all or a portion of its business and there is any substantial common ownership, management or control of the transferor and transferee, the experience rating records of the transferor and transferee shall be combined for the purpose of determining their contribution rate. • An employer that knowingly pays or attempts to pay contributions at a rate that is inconsistent with the SUTA dumping law is subject to substantial civil penalties and criminal liability, as is an individual or entity that knowingly advises another to pay or attempt to pay contributions at a rate inconsistent with the SUTA dumping law.

  10. Workers’ Compensation • Workers’ Compensation System • Insurance that is purchased by employer to protect employees from losses due to injury or death incurred during employment. • Employers are mandated by state law to provide workers’ compensation insurance. • Premium rate based on a percentage of gross wages. • A higher premium exists for factory employees, as compare to office employees. Insurance Premium for Admin (Clerical) Worker: $0.30 per $100 in Wages Insurance Premium for Factory Worker: $6.80 per $100 in Wages

  11. Journal Entries • Payroll Register • Provides detailed information about the payroll for each pay period. • The totals of the Payroll Register are used to Generate Journal Entries, which record the payroll in the accounting records. • The payroll register information for each employee is transferred to his/her’s Earnings Record.

  12. Journal Entries • Employee’s Earnings Record • Contains the employee’s W-4 information (used to calculate FIT & SIT for each pay period). • Payroll Register information (earnings, deductions, etc.) is transferred here and accumulated in order to make reporting easier and to determine wage limits for taxes. • The information in the Employee’s Earnings Record is used to populate the employee’s W-2 at the end of the year.

  13. Think about the EE (employee) portion of the transaction. Think about the ER (employer) portion of the transaction. Journal Entries • Journalizing Payroll Transactions • Recording the Payroll Transaction  (Remember: Two Journal Entries) Below is a Simplified View (for Illustrative Purposes Only) To record Wages Expense for the pay period: Wages Expense$ XXX.XX Withholding Payables (includes taxes) $ XXX.XX Cash $ XXX.XX To record Payroll Tax Expense for the pay period: Payroll Tax Expense$ XXX.XX Payroll Taxes Payable $ XXX.XX

  14. Previously recorded on July 26th. End-of-Period Adjustment Journal Entries • Journalizing Payroll Transactions • Recording End-of-Period Adjustments  Wages Payable or Accrued Wages Friday, July 26th: Wages Expense$ 5,000 W/H Payable (includes taxes) $ 1,000 Cash $ 4,000 To record Wages Expense for the period 7/29 – 7/31: July 31st: Wages Expense$ 3,000 Wages Payable $ 3,000 August 2nd: Wages Expense$ 2,000 Wages Payable $ 3,000 W/H Payable (includes taxes) $ 1,000 Cash $ 4,000

  15. Journal Entries • Journalizing Payroll Transactions • Recording End-of-Period Adjustments  Vacation Payable or Accrued Vacation Example: An employee has earned 10 days of vacation for the year and has used 9 days during the year. If the company policy is to allow the employee to carry over the day of vacation to the next year, then the following transaction needs to be recorded by December 31st… (assuming the employee earns $300 per day) To record Accrued Vacation as of December 31, 20XX: December 31, 20XX: Vacation Expense (Fringe Benefits)$ 300 Vacation Payable $ 300 Then, when you pay the employee their vacation day in the following year (period), the entry would look like this… To record use of Accrued Vacation as of February 28, 20XX: February 28, 20XX: Vacation Payable$ 300 Cash $ 300

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