CHAPTER 5

UNEMPLOYMENT COMPENSATION TAXES

Developed by Lisa Swallow, CPA CMA MS

Payroll Accounting 2013Bernard J. Bieg and Judith A. Toland

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)

• 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 (pages 5-12 and 5-13))

• 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

LO-2

FUTA Rates

• FUTA rate = 6.0% of first $7,000 of gross wages for each employee per year

• 5.4% credit against FUTA (allowed for SUTA taxes)*

Therefore gross 6.0%

less 5.4% credit

= .6% 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• Made SUTA contributions on timely basis - on or

before due date for filing• Note: even if employer pays into more than one

fund, credit still limited to 5.4%• 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 11/10/12)

LO-3

SUTA Laws & Rates• Each employer’s rate based upon experience

rating (see next slide)• New employer’s pay an initial contribution rate

that applies for specific period of time• 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

• When filing a corrected form, mark the “Amended” box and include explanation as to why an amended return is filed

• 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• Required to deposit federal taxes electronically unless

employer has $2,500 or less in quarterly tax liabilities

• 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

*If falls on Saturday, Sunday or legal holiday, have until following business day

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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 year-end

• Use voucher 940V

Penalties apply for failing to file 940 return, pay FUTA taxes when due and/or make timely

deposits 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 multiplied by taxable SUTA

wages• Amount of required payment• Usually includes wage information report per

employee LO-6