module payroll

7/31/2019 Module Payroll

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Craig Pence, 2009. All rights reserved.

Copyright Notice. Each module of the course manual may be viewed online, saved to disk, or printed (each is composed of 10 to 20

printed pages of text) by students enrolled in the authors accounting course for use in that course. Otherwise, no part of the Course

Manual or its modules may be reproduced or copied in any form or by any meansgraphic, electronic, or mechanical, including

photocopying, taping, or information storage and retrieval systemswithout the written permission of the author. Requests for

permission to use or reproduce these materials should be mailed to the author.

Introduction to Payroll Administration

Module 6 Unemployment Taxes

Text Reading Assignment: Chapter 5 (beginning to end).

I. Unemployment taxes are collected by state governments and used to provide support payments toworkers who become unemployed. This gives unemployed workers a source of income while they seeknew jobs. The Social Security Act (1935) required all the states to establish unemployment programs

.A. FUTA. To fund the administration of these state programs, Congress enacted the Federa

Unemployment Tax Act (FUTA) which requires that employers (not employees) pay a tax to thefederal government to pay for the administration (but not the payment of benefits) of the federaland state unemployment programs.

The IRS has produced a series of video lessons for employers that relate to income taxwithholdings laws. One of these lessons discusses the FUTA program and FUTA withholdingsrequirements. Launch the video by clicking the link below.

http://my-accounting-tutor.com/Payroll/Videos/FUTA.wmv

B. SUTA. The payment of benefits is handled by each state, and is made from the trust fundestablished by the state and funded through its respective State Unemployment Tax Act (SUTA)Each state creates its own state tax act and unemployment program and the rules and regulationsvary from state to state, but the states must conform to federal standards. This results in stateprograms that are generally similar, though their individual features differ greatly. In some statesemployees pay a portion of the state tax, in others (Illinois is one) only the employer pays thetax.

C. Workers Eligibility. In order to receive unemployment benefits, certain criteria must besatisfied.1. In Illinois, the worker must have earned at least $1,600 in wages during a 12-month base

period. The base period is defined as the first four of the five completed calendar quarterspreceding the worker's initial claim for benefits.
http://my-accounting-tutor.com/Payroll/Videos/FUTA.wmvhttp://my-accounting-tutor.com/Payroll/Videos/FUTA.wmvhttp://my-accounting-tutor.com/Payroll/Videos/FUTA.wmv


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Payroll Accounting Course Manual, Module 6 2


2. At least $440 of the $1,600 must have been earned during quarters other than the one inwhich earnings were highest.

Example: Bill Bit is laid off on November 1, 20X8 (during the fourth quarter of the year) and filesfor unemployment benefits. During the previous 5 calendar quarters, Bill earned the following

amounts:

CalendarQuarter

QuarterlyEarnings

Base PeriodEarnings

July 1 September 30, 20X8 $900 ---

April 1 June 30, 20X8 $800 $800

January 1 March 31, 20X8 $700 $700

October 1 December 31, 20X7 $600 $600

July 1 September 30, 20X7 $500 $500

Total $3,500 $2,600

Conclusion: Bill has earned $2,600 during the 12-month base period, well above the $1,600required. The April 1 June 30 quarter has the highest earnings ($800), and $1,800 (well abovethe $440 required) was earned in the other base period quarters. Bill qualifies for unemploymentbenefits.

D. Additional Information.1. An eligible claimant can receive up to 26 weeks of regular benefits during the year after

he or she first files a claim. During periods of high unemployment, additional weeks ofextended benefits may be authorized.

2. The amount of weekly benefits paid depends on the amount of wages earned during thebase period -- specifically, on average weekly earnings during the two quarters in whichearnings were highest. The Act sets minimum and maximum weekly benefit amounts;within those limits, a claimant's weekly benefit amount will be roughly half his or herformer wages.

3. The weekly benefit payment may be increased by a dependent's allowance. It may bedecreased if the claimant receives income from other sources.

4. Benefits may be denied to employees who have voluntarily quit a job without good causeattributable to the employer, been discharged for misconduct connected with the job, orwho have ceased work due to involvement or participation in a labor dispute.

5. Benefits may be discontinued because of physical inability to work, failure to adequatelysearch for work, unavailability for work (including refusal of a suitable job offer or

refusal of a former employer's recall).

II. FUTA Tax Rates, Earnings Limitations and Calculations.

A. The FUTA tax rate is 6.2% of the first $7,000 paid each employee during the calendar year. It isonly the cash wages paid during the year that count in the determination of earnings, and notaccrued wages.


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B. Employers are given a credit against the federal rate for participation in state programs. Theamount of the credit is 5.4% of the first $7,000 in wages paid, resulting in a net effective FUTAtax rate of .8% (6.2%-5.4%).1. To receive the full credit, employers must make the required state contributions on or

before the due date for filing the annual FUTA return (form 940), which is January 31 of

the following calendar year.2. If an employer has not made the state payments in full by February 2 of the followingcalendar year, the credit is reduced by 10% of the portion of the state tax that was late.

Example: Adams Company had annual taxable wages paid of $100,000 and pays SUTAtaxes at a rate of 5.4% for total SUTA taxes of $5,400. The FUTA tax before the statecredit is $6,200 ($100,000 x 6.2%). The amount of the state tax credit is $5,400($100,000 x 5.4%), and the net tax due is $800 ($6,200 - $5400). Had Adams paid $400of its state tax liability after the due date of From 940, a 10% penalty would have beenimposed, and $40 ($400 x 10%) of the state tax credit would have been lost. The FUTAtax would now be $840 ($6,200 - $5,360).

3. Experience ratings (or merit ratings) are given by the state to employers who have goodemployment records, and they have the effect of reducing the state tax rate levied uponthe employer. Despite the fact that the employer may pay more or less than 5.4% to thestate, the FUTA state tax credit is kept at a full 5.4% for all employers who make timelypayment to the state.a. If the employers state rate is less than 5.4%, penalties imposed for late payment

are based only upon the cash amount paid late, irregardless of the actual state rateimposed.

Example: Adams Company had annual taxable wages paid of $100,000 and pays SUTA

taxes at a rate of 3%. for total SUTA taxes of $3,000. The FUTA tax before the statecredit is $6,200 ($100,000 x 6.2%). The amount of the state tax credit is still $5,400($100,000 x 5.4%), and the net tax due is $800 ($6,200 - $5400). Had Adams again paid$400 of its state tax liability after February 2, a 10% penalty would have been imposed,and $40 ($400 x 10%) of the state tax credit would have been lost. The FUTA tax wouldnow be $840 ($6,200 - $5,360).

Now suppose that Adams Company had annual taxable wages paid of $100,000 and paysSUTA taxes at a rate of 7%. for total SUTA taxes of $7,000. The FUTA tax before thestate credit is $6,200 ($100,000 x 6.2%). The amount of the state tax credit is again keptat $5,400 ($100,000 x 5.4%), and the net tax due is $800 ($6,200 - $5400). Had Adams

again paid $400 of its state tax liability after February 2, a 10% penalty would have beenimposed, and $40 ($400 x 10%) of the state tax credit would have been lost. The FUTAtax would again be $840 ($6,200 - $5,360).

b. When the states wage base is higher than the $7,000 set for FUTA taxes, theamount of state taxes paid at 5.4% can be greater than the 5.4% credit allowed forFUTA taxes.


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Example: For FUTA purposes ($7,000 wage base), Adams Company had annual taxablewages of $100,000. The state in which the company pays SUTA taxes has set a wagebase of $9,000, which results in $130,000 of taxable wages for SUTA purposes. Adamspays SUTA taxes at a rate of 5.4%. for total SUTA taxes of $7,020 (5.4% x $130,000)

The FUTA state credit is still $5,400 ($100,000 x 5.4%).

c. Employers of workers who earn wages in more than one state must payunemployment taxes in each state where the work is performed, on the wagesearned in that state. Despite payment to multiple states, the state credit for FUTAtaxes is still 5.4% of the first $7,000 in total wages paid to the employee.

D. Title XII advances may reduce the state tax credit for FUTA taxes. These advancesrepresent loans from the federal government to states that are unable to pay theirunemployment benefits. The reduction in the state tax credit begins in the secondcalendar year after the advance is made, but only if it has not been repaid, and it amounts

to .3%. If the balance is still outstanding in the third year, another .3% reduction isapplied (total reduction = .6%). These .3% annual reductions may continue, but they arelimited to a total of no more than .6% as long as the state meets the solvency standardsset by the Department of Labor.

Example: For FUTA purposes ($7,000 wage base), Adams Company had annual taxablewages of $100,000. The state in which Adams pays SUTA taxes has taken Title XIIadvances and kept them outstanding for three years, but has met the DOLs solvencystandards. Adams state tax credit is 4.8% (5.4%-.6%) of the first $7,000 in wages paidits employees.

Note from the Instructor:Highland Community College is located in Illinois, so the information that follows is specific to Illinois. Thetext that accompanies these module outlines was written for a national market, and does not provide thisinformation. For additional information, forms, etc., see the Illinois Department of Employment Securityswebsite athttp://www.ides.state.il.us/employer/uitax.asp.

III. SUTA Tax Rates, Earnings Limitations and Calculations.

A. Beginning in 2010 in Illinois, the state unemployment tax paid by an employer is avarying percentage rate multiplied by the first $12,520 of wages paid an employee duringthe calendar year. Earnings above this $12,520 earnings base are not taxed. The earningsbase changes from year to year. In 2010 it was raised from the $12,300 limit that waseffective in 2009.
http://www.ides.state.il.us/employer/uitax.asphttp://www.ides.state.il.us/employer/uitax.asp


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B. The percentage rate used by the employer in Illinois can vary between a maximum rateand a minimum rate. For 2010, the maximum rate is 7.25% and the minimum rate is.65%. These rates increased from the 6.8% maximum and .6% minimum rates that werein effect in 2009. Changes in rates are common, and they can sometimes vary by quite alot. In 2005, for example, there was a 9.8% maximum and a 1.2% minimum rate!

1. The maximum rate and the minimum rate are each determined by applying arather complicated formula to the current year'sfactor values (see below):

2. The state experience factorvalue is determined by the state each year, and it is seat a level that ensures the solvency of the fund while avoiding excessivesurpluses. It is announced each year, usually in October, for the following year.

3. To determine the maximum and minimum SUTA rates, the current year's stateexperience factor value is multiplied by a base rate (6.4% and .2% for themaximum and minimum rates, respectively). The result is rounded to the nearest

tenth of a percent. The maximum rate must be at least 6.4% or higher, and theminimum rate cannot be less than .2%. The minimum and maximum rates arethen adjusted by adding on a special fund building premium (applied to build upreserves in the trust fund). For 2010, the state experience factor value is 107%and the fund building premium amount is .45% (45 hundredths of a percent, or.0045 in decimal). Therefore, the maximum rate is EITHER equal to 6.4%multiplied by the adjusted state experience factor OR 6.4%, whichever is higher --plus the .45% fund building premium. The minimum rate is equal to EITHER .2%multiplied by the adjusted state experience factor OR .2%, whichever is higher --plus the .45% fund building premium. To illustrate:

Maximum = (6.4% x 1.07) + .45% = 6.8% + .45% = 7.25%Minimum = (.2% x 1.07) + .45% = .2% + .45% = .65%

Example: Assume, for a given year, that the state experience factor is 107% and the fundbuilding premium is 0.7%. If so, the minimum contribution rate for the year is 0.9%(0.2% x 1.07 plus the 0.7% Fund Building Premium = .914%, which rounds to .9%) andthe maximum contribution rate is a rounded 7.5% (6.4% x 1.07 plus the 0.7% FundBuilding Premium).

In 2006, the adjusted state experience factor was 127%. Therefore, the maximumcontribution rate for 2006 was 8.9% [(6.4% x 1.27) + .8%], and the minimum rate was

1.1% [(.2% x 1.27) + .8%]. Caution: these calculations are subject to legislativechange. In 1996, for example, when the fund building premium was .4%, the unadjustedminimum was set by statute at .1% without regard for the state experience rating, so theminimum rate became .5% (.1% + .4%).

C. Small business exception: employers whose total taxable wages for a quarter are lessthan $50,000 are taxed at rate that cannot exceed a maximum amount of 5.4%.


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D. Initial starting rates: New employers (those becoming liable for the unemployment taxeswithin the prior two years) who have no experience rating with the state are given anintroductory starting rate. For 2006, employers who became liable for the payment ofcontributions on or after January 1, 2004 paid an introductory rate of 4.2%. This rate

included the 0.7% fund building premium. For 2010, employers who became liable forunemployment taxes on or after January 1, 2008, pay an introductory rate of 3.35%. Thetable below summarizes the factor values for several years. Note how the rates variedfrom year to year as the factor values changed.

YEAR 2004 2005 2006 2007 2008 2009 2010STATE EXPERIENCE FACTOR 123% 139% 127% 115% 103% 91% 107%BENEFIT CONVERSION FACTOR 138.4% 138.4% 138.4% 138.4% 138.4% 138.4% 138.4%STARTING RATE 4.00% 4.70% 4.20% 3.90% 3.40% 3.10% 3.35%MINIMUM RATES 0.90% 1.20% 1.10% 1.00% 0.80% 0.60% 0.65%

MAXIMUM RATES 8.60% 9.80% 8.90% 8.20% 7.20% 6.80% 7.25%FUND BUILDING 0.70% 0.90% 0.80% 0.80% 0.60% 0.40% 0.45%SMALL EMPLOYER RATE 5.40% 5.40% 5.40% 5.40% 5.40% 5.40% 5.40%WAGE BASE $9,800 $10,500 $11,000 $11,500 $12,000 $12,300 $12,520

Illinois Department of Employment Security Revenue Division

E. Subsequent rates. Employers are initially given a fixed starting SUTA rate, but afterthree consecutive years of incurring unemployment tax liability they become experience-rated employers and the SUTA rate becomes variable. An experience-rated employerqualifies for a variable rate based on the "experience" the state has had with theemployer. The term "experience" here refers to the number of the employer's formerworkers who drew unemployment benefits and the amounts paid to them.

1. For experience-rated employers (those with three or more years of experience)the SUTA tax rate is based on the benefit ratio. This ratio is determined in such away that the greater the amount of unemployment benefit payments caused by theemployer, the higher the rate. There are three components of the Benefit Ratio:

Benefit Charges - The amount of unemployment benefits paid to formeremployees during the benefit charge periods listed below (the period touse depends on the number of years the employer has been payingunemployment taxes). These benefit charges are listed on the BEN-118Statement of Benefit Charges received from the state of Illinois.

Benefit Conversion Factor (BCF) - The BCF is computed by the stateeach year and announced early in the year, usually January. The BCF has

remained constant for several years at 138.4%. Taxable Wages -- These are the wages recorded by the employer for the

benefit charge period as reported on the UI-3/40 Quarterly Contributionand Wage Reports.

2. To illustrate the calculation of the Benefit Ratio, assume that it is 2010 and youhave been in business, with employees, for some time now.a. If you have incurred liability within each of the three calendar years

immediately preceding 2010, calculate your Benefit Ratio as follows:



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Total the Benefit Charges for the period July, 2008 though June2009.

Multiply the total Benefit Charges by the Benefit ConversionFactor of 138.4%.

Divide these Converted Benefit Charges by the employersTaxable Wages for the period July, 2008 through June 2009.

This result, rounded to four places past the decimal and expressedas a percentage, is your Benefit Ratio.

b. If you have incurred liability within each of the four calendar yearsimmediately preceding 2010, calculate your Benefit ratio as follows:

Total the Benefit Charges for the period July, 2007 through June2009.

Multiply the total Benefit Charges by the benefit ConversionFactor of 138.4%.

Divide these Converted Benefit Charges by your Taxable Wagesfor the period July, 2007 through June, 2009.


c. If you have incurred liability within each of the five calendar yearsimmediately preceding 2010 calculate your Benefit Ratio as follows:

Total the Benefit Charges for the period July, 2006 through June2009.

Multiply the total Benefit Charges by the Benefit ConversionFactor of 138.4%

Divide these Converted Benefit Charges by your Taxable Wagesfor the period July, 2006 through June, 9


d. Once 5 years of "experience" are reached, additional years are notconsidered. Therefore, employers who lay off workers in a given year willsee their benefit ratios (and SUTA tax rates) increase in the followingyear. This effect will continue for four more years, and the employer'sbenefit ratio (and SUTA taxes) will not return to normal levels until the 5years pass.

2. Once the benefit ratio is determined, it is multiplied by the state experience factor(127% in 2010) and rounded to the nearest one tenth of one percent. The stateexperience factor is calculated by the state each year and is set in order to ensure

the solvency of the fund while avoiding excessive surpluses. It is announced eachyear, usually in October, for the following year.3. To finally determine the employer's SUTA tax rate, add the fund building

premium of .45% (for 2010) to the number calculated in step 2 above. This is theemployers contribution rate. It must fall within the minimum contribution rate(.65% in 2010) and the maximum contribution rate (7.25% in 2010). NOTERemember that a small employer whose calculated contribution rate is 5.5% or


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higher and whose total quarterly wages are less than $50,000, pays contributionsat 5.4% in that quarter.

Examples of Rate Calculation (based upon 2004s 123% experience factor and the 20048.6% maximum and .9% minimum SUTA tax rates).

1. An employer's Benefit Ratio of 0.0722% is multiplied by the 2004 StateExperience Factor of 123% to get 0.0888% which rounds to 0.1%. Althoughadding the Fund Building Rate of 0.7% equals 0.8%, the employer's 2004contribution rate is the minimum rate of 0.9%.

2. An employer's Benefit Ratio of 1.5299% is multiplied by the 2004 StateExperience Factor of 123% to get 1.8818% which rounds to 1.9%. After addingthe Fund Building Rate of 0.7%, the employer's 2004 contribution rate isdetermined to be 2.6%.

3. An employer's Benefit Ratio of 8.0612% is multiplied by the 2004 StateExperience Factor of 123% to get 9.9153% which rounds to 9.9%. Althoughadding the Fund Building Rate of 0.7% equals 10.6%, the employer's 2004

contribution rate is the maximum rate of 8.6%.

NOTE: See the Supplement at the end of this module for a comprehensive illustration of thedetermination of SUTA tax rates and the effect of benefit charges upon the SUTA tax liability.

F. SUTA Dumping. In 2006 the state of Illinois implemented federal requirements thatforced the individual states to crack down on employers who illegally lower theirunemployment insurance taxes by setting up dummy business entities. The law imposesfederally mandated penalties for "SUTA dumping." This occurs when a company with

high unemployment insurance contribution rates deliberately creates a new businessentity and dumps its employees into it, thereby qualifying for a new starting SUTA taxrate and fraudulently reducing its SUTA taxes. The practice forces other, law-abidingemployers to make up the difference through an increase in the State Experience FactorCompanies violating the law are guilty of a Class B misdemeanor and its officers couldface jail time of up to 60 days, and the company can have a 50 percent penalty surchargeapplied to its annual contribution rate for up to four years. In addition, the company, andany individual who consulted the company to engage in a SUTA dumping practice, couldbe fined up to $10,000 in civil penalties.

G. How Benefit Charges are Determined, Rights of Employers

1. IDES lists each benefit payment in the account records of a "chargeableemployer." These "benefit charges" ultimately affect the employer's tax rate. Thechargeable employer is the employer whoa. laid the claimant off or reduced his hours; and was the last one to employ

the claimant before he filed his claim (for a period of at least 30 workingdays), or who

b. provided employment that allowed the claimant to requalify for benefitsafter he was disqualified for certain reasons.


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2. Employers have the right to protest former employee's claims and to appeal anyadverse decision.

IV. Who must pay unemployment tax?

Employers of "one or more in twenty weeks" or employers with $1,500 or more of quarterly payrollmust pay federal and state unemployment tax. An employing unit, except certain types of nonprofiorganizations or local governmental entities, that has one or more persons in employment in Illinoison any one day within each of 20 or more calendar weeks in any calendar year is required to paycontributions for that calendar year and for at least the following calendar year, even though it didnot or does not have one or more employees in as many as 20 weeks in that second year. Anemploying unit that does not meet the "one or more" test but pays or paid wages for services inemployment of $1,500 or more during any calendar quarter of a calendar year ($1,000 in the case ofdomestic service work) is required to pay contributions for the remainder of that calendar year andfor at least the following calendar year. It must also pay contributions quarterly thereafter. In the

case of farm work, the employer must have paid $20,000 in cash wages in one calendar quarter, oremployed 10 or more workers in each of 20 weeks in a given calendar year.

EXAMPLE: Even if the twentieth week in which one or more persons were employed falls in thelast part of December of a particular year, or $1,500 in wages are paid for the first time in thefourth quarter of the year, the employing unit is liable for contributions on its taxable payroll forthat year and also for the following year. It must file its first report in January of the second yearand pay contributions based on its first years taxable payroll, and it must file reports for eachquarter in which it had paid employees.

A. Once having had one or more persons in employment on any one day within each of 20 or more

calendar weeks in any calendar year, or once having paid $1,500 or more in wages in anycalendar quarter for services in employment, an employing unit will have to pay contributionsfor that year and for every year thereafter unless it has a year with less than "twenty weeks ofone;" AND all the quarterly taxable payrolls in that year are less than $1,500; AND it asks theDirector of Employment Security (in writing) to be relieved from the requirement of payingcontributions; AND such request is granted.

1. There is a time limit for filing such a request. For the termination of coverage to be effectiveas of January of any calendar year, the request must be filed prior to February 1 of that year.

2. However, an employer that no longer has services being performed for it in Illinois canrequest termination immediately if it files an application with the Director within 5 days of

the date that its next wage report is due. However, if the employer again has individualsproviding services to it during that calendar year or the following calendar year, thetermination shall be rescinded as of the date that the termination was originally granted.

B. For an employing unit to have in employment one or more individuals within each of 20 or morecalendar weeks does not mean that an employing unit must necessarily have a staff of one ormore regular, full-time workers for 20 weeks in a row, or that the same individual is employed in
http://www.ides.state.il.us/employer/general/appeal.htmhttp://www.ides.state.il.us/employer/general/appeal.htm


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each such week. A part-time worker, who works for only a half hour one day a week, counts justas much in each week as one regular, full-time worker.

Example: If the employing unit hired a different part-time worker each week for 20 calendar weeks,it would have to pay contributions for that year and for at least the next calendar year.

C. The week to be used in determining liability is a calendar week, which may not necessarily bethe employer's payroll week. An employer's payroll week could end on any day of the week, buta calendar week begins at 12:01 A.M. on Sunday and ends at midnight on the followingSaturday. If a worker works a few hours on Saturday and a few hours on Sunday in the sameweekend, he is working in two different calendar weeks.

D. All individuals performing services for an employing unit are counted in determining the numberof workers or in determining the quarterly taxable wages except for the following. Compensationpayments to these persons are specifically exempted from SUTA taxes.1. The owner or owners (partners) of an employing unit (Section 206).

Officers of a corporation, even if they are the sole stockholders, are not considered theowners of the business of a corporation. They usually are considered to be in employmentand must be counted.

2. Directors of a corporation acting in the capacity of a Director or on a committee provided forby law or by the charter or the by-laws of the corporation.The services on the committee must be as a Director dealing with broad matters of policyand not those ordinarily performed by an officer or other employee of a corporation (Section232). This Section does not apply to certain nonprofit organizations.

3. The owner's father, mother, spouse, and the owner's child under the age of 18.However, a person working for a corporation is counted even though the owner of all thestock is the worker's son, daughter, spouse or parent. (Section 218)

4. Persons who do not perform any of their services in the State of Illinois.However, after 1971, if such person is not covered by any other state or Canada, his servicesare considered to be Illinois employment if the place from which the services are directed orcontrolled is in Illinois.

5. Persons free from the employer's control and direction who are engaged in an independenttrade, occupation, business or profession.If they perform services which are outside the course of the employer's business orperformed outside the place of business (Section 212). This provision is much more narrowlydefined than what is commonly known as an "independent contractor." See 56 Ill. AdmCode 2732.200 for the factors considered in the application of this exception.

6. Agricultural and aquacultural workers.

Only certain specified types of these workers are counted in employment. The worker shouldbe counted if the employing unit paid cash wages of $20,000 or more in any calendar quartereither in the current or preceding year to workers employed in agricultural or aquaculturallabor, OR the employing unit employed 10 or more such workers in each of 20 or moreweeks in either the current or preceding year (Sections 214 and 211.4).

7. Domestic workers in private homes, local college clubs and local chapters of collegefraternities or sororities.


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Unless the employer had paid cash wages of $1,000 or more in any calendar quarter in eitherthe current or preceding calendar year to an individual or individuals employed in suchdomestic service (Sections 215 and 211.5).

8. Officers or members of the crew of a vessel that is not an American vessel or that is directedor maintained from an operating office outside this State.

This includes persons whose services are performed outside this State. This also includespersons whose services are performed on or in connection with an aircraft, which is not anAmerican aircraft, if the person is employed on or in connection with such aircraft whenoutside the United States (Section 216).

9. Real estate salesmenUnder certain conditions (Section 217).

10. Persons under the age of 18 who deliver newspapers or shopping news and any persons whodeliver newspapers or shopping news to the ultimate consumer.If substantially all of their remuneration is on a "per piece" or output rather than an hourlybasis and they work under written contracts that indicate they are not to be treated asemployees for federal tax purposes. Freelance editorial and photographic work for

newspapers is also exempt (Section 225).11. Insurance agents who are paid solely by commission (Section 228).12. Persons who perform services in another state as well as in Illinois.

But only if the Director of Employment Security has agreed to consider all of their servicesperformed in another state (Section 2700).

13. Certain persons performing services for nonprofit organizations.(See the section on nonprofit organizations for a complete explanation.)

14. Certain persons who perform services for governmental entities.(See the section on governmental entities for a complete explanation.)

15. Direct sellers of consumer goods outside of a retail establishment.But only if the remuneration for such service is directly related to sales, rather than hours

worked, and the services are performed pursuant to a written contract that provides that theperson shall not be treated as an employee for federal tax purposes (Section 217).

16. Owner-operators of their own trucks.But only under certain specified circumstances as provided in the Act (Section 212.1 and 56Ill. Adm. Code 2732.205).

17. Real estate closing agents.When their contracts with the title insurance company specify that they are not employeesand that they are paid on a per closing basis (Section 217.1).

18. Real estate appraisers.If their written employment contracts provide that they are paid on a fee per appraisal basisand that they are free to accept or reject appraisal requests from that entity or other entities

(Section 217.2).19. Golf caddies.

If they are full-time students under the age of 22 and are paid directly by a golf club memberor by the golf club on behalf of a member (Section 232.1).


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V. Reporting Forms and Filing Requirements

A. Federal Form 940. Form 940 (or 940EZ) is used to report the employers annual federaunemployment tax liability.1. Form 940EZ may only be used if the employer (a) paid state unemployment taxes in jus

one state, (b) has made the state unemployment tax payments by the due date of Form940EZ (January 31), and (c) paid wages that are taxable for both state and federalunemployment.

2. The due date for Form 940 is January 31 of the following calendar year. If timelydeposits have been made and the total liability has been paid in full through them, thenthe due date is extended to February 10.

3. Postmark dates determine the date filed.4. See chapter 5 of the text for examples.

B. Quarterly deposits of FUTA taxes are required if the accumulated FUTA liability exceeds $500When this happens, the deposit must be made by the end of the month following the end of the

quarter. If any deposit due date falls on a Saturday, Sunday, or legal holiday, the deposit is dueon the next business day.1. Quarterly deposits must be made at the bank with an accompanying Form 8109 coupon

marked 940 and with the proper quarter marked.2. If, at the end of the year, the total accumulated liability is less than $500, the fourth

quarters payment may be mailed with Form 940 instead of being deposited at the bank.

Example: Davidson Companys FUTA tax liability is $150 for the first quarter, $195 for thesecond quarter, $230 for the third quarter, and $240 for the fourth quarter. Davidson musmake a quarterly deposit of $575 by October 31. In addition, since Davidsons liability is only$240 at the end of the fourth quarter, the $240 deposit may be made with its annual Form 940

filing. Had the accumulated liability been more than $500, the deposit would have had to havebeen made at the bank with a Form 8109.

C. SUTA Filings, Deposits and Record Keeping Requirements.1. Illinois requires new employers whom have not paid contributions or has not filed a

report of its employment experience to complete and file Form UI-1 (Report toDetermine Liability) from the Revenue Division of the Department of EmploymentSecurity. This report must be completed and filed with the Revenue Division. A newlycreated employing unit must file this report within thirty days after it begins business.

2. Any employing unit, including those not liable for the payment of contributions, whichgoes out of business, or transfers or sells substantially all of its business assets or its

business, or is involved in any change must submit Form UI-50A (Notice of Change) tothe Department of Employment Security within ten days of such change. This report alsomust be filed if a business sells a separate part of its business or the assets of suchseparate part.

3. All employers determined to be liable for the payment of contributions must file FormUI-3/40 (Contribution and Wage Report) quarterly. Similar forms must be filed bynonprofit organizations and local governmental entities that elect to reimburse benefits inlieu of paying contributions. The wages of the workers for a calendar quarter are


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reported on Form UI-3/40. Before mailing the UI-3/40 to the employer, the Departmentof Employment Security imprints on it the employer's name, address, account numberand the rate at which contributions are to be computed. The UI-3/40 should be completedand promptly returned with a check or money order covering the contributions due. Thecheck should be made payable to The Director of Employment Security and mailed with

the Report and Transmittal to the designated address. These forms should be mailedusing the envelope provided.a. An employer who has been paying contributions but who has paid no wages in a

calendar quarter because of temporary inactivity must file a quarterly reportshowing "no wages paid." If the employer terminates business, he should file afinal report showing the wages paid in the last quarter of business and should alsofile a Form UI-50A. (56 Ill. Adm. Code 2760.110)

b. Effective with reports due for the first quarter of 1994, the UI-3/40 must be filedby the use of electronic media which has been approved by the Director if theemployer reasonably expects to have 250 or more workers in its employ duringthat year or had 250 or more workers in its employ during the previous year

Failure to comply with this requirement will result in penalties to the employerWaiver of this requirement is allowed only where the employer has been granteda waiver of the similar federal electronic reporting requirement.

c. An employer whose payroll records are maintained on data processing equipmentand who is not subject to the requirement explained in the previous paragraphmay submit its individual workers' wages on electronic media. Information anddetailed instructions for reporting on tape may be obtained by writing toDepartment of Employment Security , Attn: Document Control, 401 S. StateStreet, Chicago, IL 60605

D. Employer Records. All individuals or firms that employ one or more workers must maintain

and preserve payroll records that show (56 III. Adm. Code 2760.115):1. Each worker's name (including temporary and part-time workers).2. Each worker's social security account number.3. The city or county in which each worker is employed.4. The dates upon which each worker performed services.5. The date on which each worker was hired, the date on which each worker was laid off

discharged or quit, and the date of rehiring after temporary layoffs.6. The monthly, weekly, daily or hourly rate of pay, or the piecework rate if the worker is

paid on a piecework basis.7. The number of hours worked by each worker paid at an hourly or piecework rate.8. The customary or scheduled fulltime hours for each worker paid on an hourly or

piecework basis in the employment in which he is engaged.9. The dates covered by the employer's pay period, the wages paid each worker for each pay

period and the total wages for each pay period.10. The record of wages paid must include:

a. Money wages paid, such as wages, salary and commissions.b. Reasonable cash value of remuneration other than cash such as board, room

laundry, etc., except where a meal is provided for the benefit of the employer. (56Ill. Adm. Code 2730.100)


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c Special payments, such as bonuses, gifts, prizes, dismissal pay, vacation pay orpay in the nature of vacation pay, wages in lieu of notice, and the period of timethese special payments cover.

d. The amount of tips and gratuities, where these are customarily received byworkers from persons other than the employer and are reported to the employer

by the worker.11. All payroll records must be kept in such a way that quarterly wages of each worker andthe weeks in which the workers performed their services may be easily determined.

12. The records of employing units must be preserved for at least five years, or until adetermination and assessment of contributions, interest, or penalties is made or an actionfor the collection of contributions, interest or penalties has become final or is canceledand withdrawn. (Section 1801)

E. Notice Of Claim1. As soon as possible after a claim is filed for benefits, a Notice of Claim to Last

Employing Unit and Last Employer or Other Interested Party is sent to the claimant's last

employing unit, the employer whose experience rating will be chargeable if benefits arepaid to the individual and to any other individual or organization for which the individualprovided services subsequent to the beginning of his benefit year. The same notice is sentwhen an additional claim or a claim for Extended Benefits is first filed.

2. An employer which receives the above Notice and which believes that the claimant maybe ineligible for benefits for any reason, must AT THAT TIME file a letter or a Notice ofPossible Ineligibility (Form UI(ILL) BIS-32)(return copy) if it wishes to be a party to theclaims adjudicator's determination.a. Unless the employer is a party to a determination, it would not have the right to

appeal an adverse determination. This Notice must be mailed to the local officedesignated on the form, and by the designated "REPLY DUE DATE " (within

TEN days from the NOTICE OF CLAIM). As mentioned above, if the Notice isnot sent on time, the employer loses its appeal rights except with regard to theissues of availability, disqualifying income, refusal of work or "not unemployed"for subsequent weeks. (Section 702 and 56 Ill. Adm. Code 2720.130)

b. If an employing unit discharges an individual for an alleged felony or thefconnected with his work, the employing unit must, within 10 days of the date thatthe individual files his next claim for benefits, notify the following office:

Illinois Dept. of Employment SecurityAttn: Labor Dispute Unit401 S. State St., 7 South

Chicago, IL 60605


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VII. Notifying Workers of Their Rights Under SUTAA. Illinois employers are required to inform workers about their rights to unemployment insurance

benefits.

1. Posters are available by download from the IDES website or by contacting IDES at 800-247-4984 or 312-793-4880. The following posters are mandatory: Notice to Workers About Unemployment Insurance Benefits (IDES) Equal Employment Opportunity is the Law Your Rights Under the Family and Medical Leave Act Job Safety and Health Protection Notice: Employee Polygraph Protection Act Fair Labor Standards Act - Federal Minimum Wage Notice to Workers with Disabilities Migrant and Seasonal Agricultural Worker Protection Act (MSPA) Notice to Employers and Employees Worker's Compensation: Notice to Employees from the State of Illinois

2. When a workers employment is terminated, the employer must give the worker a copy ofthe brochure titled What Every Worker Should Know about Unemployment Insurance(Form BEN-39). If it cannot be hand-delivered, it must be mailed to the worker's lastknown address within five days of separation. The IDES provides the brochures at nocharge.

VIII. CertificationA. Congratulations upon your completion of our course! As you studied these modules, you were

given a comprehensive overview of the rules and regulations that govern the careers of payrollprofessionals in America. Before we leave our course, you should be aware of the requirementsand the opportunities regardingcertification in payroll. There are two kinds of certification thatyou should know about:1. The Internal Revenue Service (IRS) is moving toward regulation of the tax preparation

industry. Previously, anyone who "hung out a shingle" could prepare income tax returnsfor clients and charge a fee for doing so. Beginning in tax year 2011, all tax preparers whoreceive a fee for completing a federal tax return will be required to obtain a preparer taxidentification number (PTIN) and become certified. Enrolled Agents1, Certified PublicAccountants and lawyers are exempt from this rule, but anyone else will now have to passa certification examination in order to prepare tax returns for clients.a. Will the income tax certification requirement, then, apply to individuals who only

prepare payroll or other non-income tax returns? Yes. Individuals who arecompensated for preparing, or assisting in the preparation of, all or substantially

1 Enrolled Agents are licensed to practice by the federal government and, like CPA's and attorneys, may represent taxpayers beforethe IRS. The license is earned in one of two ways: (1) by passing a comprehensive examination over all aspects of the tax code, or (2)by working with the IRS for 5 years in a position in which tax regulations were interpreted and applied.
http://www.ides.state.il.us/forms/pdf/whatuno.pdfhttp://www.ides.state.il.us/forms/pdf/whatuno.pdf


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all ofa federal tax return must obtain a PTIN, and Forms 941 and 940 are federaltax returns!

b. Therefore, all independent paid tax return preparers, whether they prepare incometax returns or payroll tax returns, will be required to obtain a preparer taxidentification number (PTIN). If the preparer is not an attorney, certified public

accountant, or enrolled agent, the preparer will need to take the competency testand satisfy the continuing education requirements.c. What about employees? Will a bookkeeper employed by a business have to take

the exam if they only do their employer's 941 and 940? No. An employee whoprepares his or her employers returns is not required to sign as a paid preparerAccordingly, unless the employee prepares other federal tax returns forcompensation, he or she will not be required to register and obtain a PTIN.

d. To summarize, employees who administer the payroll function and prepare Form941 will not be required to be certified. Payroll professionals, who handle payrollsfor their clients independently, will have to have a PTIN. Unless they areattorneys, certified public accountants, or enrolled agents, they will need to take

the competency test and become certified.

2. Another form of certification should also be of interest to you. The American PayrolAssociation (APA) is a national not-for-profit organization of payroll professionals. TheAPA administers two certification programs in payroll. APA certification is a valuableobjective credential that verifies a specified level of knowledge, skills, and abilities in thepayroll profession.a. Certification helps individuals demonstrate their payroll expertise, secure

promotions, advance their careers, and enhance their standing within theprofession. As you completed our course, you studied the same material that iscovered on the APA certification examinations, and I am confident that with a

little investment of time and effort you will be able to pass the examination andbecome certified. I encourage you to consider doing this!

b. APA offers two levels of certification, the Fundamental Payroll Certification(FPC) and the Certified Payroll Professional (CPP) certification. Persons whopass the national examination may list the FPC or CPP designations followingtheir names and on their resumes, similar to the way CPAs use the CPAdesignation to publicize their status as an accounting professional.

c. The Fundamental Payroll Certification (FPC) exam has no eligibility requirementIt is open to all those who wish to demonstrate a baseline of payroll competencyThe FPC is designed for entry-level payroll professionals and students, and APAmembership is not required.

d. The Certified Payroll Professional (CPP) exam does have eligibility requirementsIndividuals must meet at least one of the three eligibility criteria:1. Employed in the practice of payroll for at least three of the five years

preceding the date of examination through either direct or relatedinvolvement in at least one of the following payroll industry areas: payrollproduction, reporting, accounting, systems, taxation, administrationeducation/consulting.


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2. Employed in the practice of payroll for at least the last 24 months andmust have completed, within the last 24 months, all of the following threeAmerican Payroll Association (APA) courses: Payroll Practice EssentialsIntermediate Payroll Concepts, Advanced Payroll Concepts, and StrategicPayroll Practices or the following two APA courses: Payroll 101 and

Payroll 201.3. Employed in the practice of payroll for at least 18 months, obtained anFPC designation, and must have completed, within the last 18 months, thefollowing APA courses: Intermediate Payroll Concepts, Advanced PayrollConcepts, and Strategic Payroll Practices or the following APA coursePayroll 201.

e. APA members receive newsletters, training opportunities, and are able to networkwith other professionals in the field. Details about membership are available onthe APAs national website at http://www.americanpayroll.org/. I wouldencourage you to now consider membership in the American Payroll Association,

and to also consider becoming certified in payroll. For more information seehttp://www.americanpayroll.org/certification/.

(See the following page for Supplement 2)
http://www.americanpayroll.org/http://www.americanpayroll.org/certification/http://www.americanpayroll.org/certification/http://www.americanpayroll.org/


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Supplement 2

Comprehensive Illustration of the Determination of Illinois SUTA Tax Rates andEffect of Benefit Charges Upon SUTA Tax Expense

Barrington Company has been in business from 20X1 through 20X8 and qualifies as a small business in the state of Illinois. The

taxable wages for SUTA purposes in each of these years was $150,000, and the introductory SUTA rate given to the company in20X1 was 3.3%.

Part I. We will now calculate the SUTA tax rates and the amount of SUTA taxes paid for each of the years 20X1 through 20X8assuming that no employees were laid off during the 8 year period. We will use a state Benefit Conversion Factor of 140% for each ofthe years in question, a fund building premium of .4%, and a State Experience Factor of 110% throughout the period. In the example,the minimum SUTA rate is .6%, and the maximum SUTA rate is 7.2%.

SUTA Tax Rate Calculations:

12/31/20X1

Incurred SUTA liability in each of the 3 prior calendar years? No. Tax rate=. 3.3% x $150,000 = $ 4,950

12/31/20X2

Incurred SUTA liability in each of the 3 prior calendar years? No. Tax rate = 3.3%. x $150,000 = $ 4,950

12/31/20X3


12/31/20X4

Incurred SUTA liability in each of the 3 prior calendar years? Yes.

Tax Rate:

Benefit Charges in period 7/1/20X2 through 6/30/20X3 $ -

Divide by Taxable Wages in this period: $ 150,000Benefit Ratio 0%

Multiply by State Experience Factor 1.1

Unadjusted SUTA Rate 0%

Add Fund Building Premium 0.40%

Preliminary SUTA Rate 0.40%

Adjust for minimum (.6%) and maximum (7.2%) limits 0.20%

SUTA Rate 0.60% x $150,000 = $ 900

12/31/20X5


Tax Rate:

Benefit Charges in period 7/1/20X2 through 6/30/20X4 $ -Divide by Taxable Wages in this period: $ 300,000

Benefit Ratio 0%






SUTA Rate 0.60% x $150,000 = $ 900


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12/31/20X6


Tax Rate:


Divide by Taxable Wages in this period: $ 450,000

Benefit Ratio 0%Multiply by State Experience Factor 1.1





SUTA Rate 0.60% x $150,000 = $ 900

12/31/20X7


Tax Rate:



Benefit Ratio 0%






SUTA Rate 0.60% x $150,000 = $ 900

12/31/20X8


Tax Rate:



Benefit Ratio 0%






SUTA Rate 0.60% x $150,000 = $ 900

Total SUTA Taxes Paid $19,350


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Part II. Let us assume now that in the third year of operations an employee was laid off and drew $6,000 of stateunemployment benefits all during the first half of 20X3. We will now recalculate the SUTA tax rates and SUTA taxes thamust be paid and determine how much additional SUTA tax was paid because of the layoff.

12/31/20X1


12/31/20X2


12/31/20X3


12/31/20X4


Tax Rate:

Benefit Charges in period 7/1/20X2 through 6/30/20X3: $ 6,000

Multiply by Benefit Conversion Factor: 1.40

Total $ 8,400


Benefit Ratio 5.60%


Unadjusted SUTA Rate 6.16%

Add Fund Building Premium 0.40%Preliminary SUTA Rate 6.56%


SUTA Rate 6.56%

Maximum SUTA rate applicable to small businesses: 5.40% x $150,000 = $ 8,100

12/31/20X5


Tax Rate:

Benefit Charges in period 7/1/20X2 through 6/30/20X4 $ 6,000


Total $ 8,400


Benefit Ratio 2.80%






SUTA Rate 3.50% x $150,000 = $ 5,250


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12/31/20X6


Tax Rate:

Benefit Charges in period 7/1/20X2 through 6/30/20X5 $ 6,000


Total $ 8,400


Benefit Ratio 1.87%






SUTA Rate 2.50% x $150,000 = $ 3,750

12/31/20X7


Tax Rate:



Benefit Ratio 0.00%






SUTA Rate 0.60% x $150,000 = $ 900

12/31/20X8


Tax Rate:



Benefit Ratio 0%






SUTA Rate 0.60% x $150,000 = $ 900

Total SUTA Taxes Paid $ 33,750

Additional Taxes Paid (Case (a) versus Case (b) ($33,750-$19,350): $ 14,400


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Group Discussion Question Problems and Exercises

Examination 4 follows Module 6. You should wait until you have received your scoreddiscussion question answer before taking examination 4. Use the practice exam to prepare for the

scored exam.

1. Right to Receive Unemployment Benefits. Robert Rotweiler was laid off from hisjob at Cosmic Collar Company on February 15, 20X1, due to downsizing of thelabor force. Robert did fall asleep at his job the week before and wasreprimanded, but such infractions of company policy do not usually result infiring. Robert had been employed for six years at Cosmic Collar, earning $24,960per year for the past two years, or $480 per week. Should Robert expect to receiveunemployment benefits as a result of his termination? Why or why not? If Robertdoes quality for benefits and begins receiving them on Monday, March 1, 20X1,

roughly what amount should he expect to receive per week and on what datewould his unemployment expire (assume no extension of the standard benefitperiod has occurred)? Suppose Robert does begin receiving benefits, but injureshis back while playing golf and is unable to return to work when recalled by hisemployer. Can Robert still continue to receive unemployment benefits?

2. Who Must Pay Unemployment Taxes? Carolyn Cobb began a house cleaningbusiness in 20X3. During the year she employed her niece, Candace Kernel, inthe business. Candace worked only on Fridays, helping Carolyn on her biggercleaning jobs. She was paid $100 each Friday that she worked. Assume there are4 Friday workdays in each calendar month during 20X3. What is the amount of

wages paid to Candace during each quarter of 20X3? Does Carolyn have to payunemployment taxes? Why or why not?

3. FUTA Credit for State Unemployment Taxes. Johnson Company has annualtaxable wages for SUTA and FUTA purposes of $50,000 and has made all therequired SUTA contributions (at a 5.4% rate) on time prior to filing Federal Form940 on January 31. (a). What is the amount of FUTA taxes that Johnson will pay?(b). Now suppose $1,000 of the SUTA taxes were late and were paid afterFebruary 2. What is Johnsons FUTA tax payment now? (c). Redo parts (a) and(b) assuming the SUTA tax rate is 6.5% instead of 5.4%. (d). Now redo parts (a)and (b) assuming the SUTA tax rate is 3% instead of 5.4%.

4. (HINT: See the supplement above for a guide to the solution of this problem).Abercrombie Company has been in business from 20X1 through 20X8. Assumethat the taxable wages for SUTA purposes in each of these years are $100,000,and that the introductory SUTA rate given the company in 20X1 was 3.3%. The


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Payroll Accounting Course Manual, Module 623

C i P 2009 All i ht d

fund building premium is .4% throughout the period. Assume further thatAbercrombie qualifies as an Illinois small business.

Calculate the SUTA tax rates and the amount of SUTA taxes paid for each of theyears 20X1 through 20X8 assuming that no employees were laid off during the 8

year period. Assume the state Benefit Conversion Factor is 140% for each of theyears in question, and that the State Experience Factor is 110% throughout theperiod. The minimum SUTA rate is .6%, and the maximum SUTA rate is 7.2%.(a). Calculate the SUTA rate paid by the company in each of the 8 years. What isthe total amount of SUTA taxes paid over the 8 year period? (b). Redo your workassuming now that in the third year of operations an employee was laid off anddrew $5,000 of state unemployment benefits during the first half of 20X3. Noother employees have drawn against the company. (c). Compare your answers in(a) and (b). How much additional SUTA tax was paid because of the layoff?

5. Determining SUTA and FUTA Tax Expense. Jetoff Travel Company employs four

workers. The companys SUTA tax rate is 3.5% of the first $9,800 in earnings,and its FUTA tax rate is .8% of the first $7,000 of earnings. Complete the table,calculating the SUTA and FUTA tax expense for the companys currentpayroll.

AccumulatedEarnings, YTD

(excluding Current SUTA FUTAEmployee current wages) Wages Taxes Taxes

Jackson, David 9,524 433Johnson, Gwen 9,573 562

Jamison, John 4,522 254Janson, Janice 6,980 500

Total 30,599 1,749

Payroll Register

6. Calculation of Minimum and Maximum SUTA rate. Assume the Illinoisexperience factor is 118%. Calculate the maximum and minimum SUTA tax ratesfor the year. Assume a fund building premium of .7% is in effect.

-End-

module payroll

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