Download chapter 5

Payroll Accounting 2012
Bernard J. Bieg and Judith A. Toland
CHAPTER 5
UNEMPLOYMENT
COMPENSATION TAXES
Developed by Lisa Swallow, CPA CMA MS
Learning Objectives
 Describe basic requirements for classification under
Federal Unemployment Tax Act (FUTA)
 Define taxable wages under FUTA
 Compute FUTA and credit against it
 Describe how experience-rating system is used in
determining state unemployment compensation
(SUTA) funds
 Complete reports required by FUTA
 Describe types of information reports required
under SUTA
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
 SUTA
 State Unemployment
Tax Act
 Different law in each state
 Funds used to pay benefits and administer program at
individual state’s level
In current economic situation, unemployment
insurance programs are being stretched very thin!
LO-1
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 5-10 and 5-11)
 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 and 5.8
*Discussion as to new wage base and rate
being discussed as of print time
LO-2
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
6.2%
less 5.4% credit
= .8% net FUTA
*Even if experience rating allows employer
to pay a lower rate than 5.4%
LO-3
Credits Against FUTA Tax
 To get full 5.4% SUTA credit, employer must
have done the following
 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 – for example, Michigan subject to
additional rate if loans not repaid by 11/10/10)
LO-3
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

LO-4
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
LO-5
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
LO-5
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 yearend
 Use voucher 940-V
LO-5
SUTA Deposit & 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
LO-6