Chapter 5

Federal Unemployment Tax Act
 Federal law that imposes an employer tax
 Required for administration of federal and state
unemployment insurance programs
State Unemployment Tax Act
 Different law in each state
 Funds used to pay benefits and administer program at
individual state’s level
FUTA originated through passage of SSA of 1935
 Employers are liable for this tax if
Pay $1,500 or more of wages in any quarter in current or
prior year
 Employ one or more persons, on one day in each of 20
weeks in current or prior year
 Special rules for agricultural and household employers
If employer owes FUTA – liable for entire year!!
Employees include
Part-time, temps and regular workers
 Workers on vacation/sick leave
 Agricultural employees (special rules)
 Household employer
General rule is everyone is considered an EE if
common-law relationship exists
Also included
Drivers who distribute food/beverage or deliver laundry
Traveling salespeople (specific situations)
Specific exceptions as follows
Independent contractors
Home workers
Full-time life insurance salespeople
Children under 21 working for parents
RRTA or governmental employees
Nonprofits (church, educational, etc.)
Complete list on page 5.4
Employees generally covered under SUTA if
covered under FUTA
Likewise employers specifically excluded under
federal law generally excluded under state laws
Many states apply “ABC” test for SUTA
Is the worker free from control/direction
 Is work performed outside usual course of business
 Is person customarily engaged in an independent
trade or business
With multi-state employees, sometimes a question
arises as to which state ER should 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 exists)
 Employee’s residence
If above does not yield appropriate answer,
Interstate Reciprocal Coverage Arrangement may be
Americans working overseas for American company are
 In all states except five and Puerto Rico
Each employer’s rate based upon
Employee turnover and
State in which business is located
Some states utilize reserve-ratio formula to lower
contributions based on low risk of unemployment
 Some states reduce rates if employers make voluntary
contributions to state fund
 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
Experience rating reflects stability of ER’s
employment history
 Also
called merit rating
 Provides for reduction in SUTA rates
 Most common formula is reserve-ratio formula
 Positive balance employers will experience lower tax
Some states require employees to contribute to
 Some states allow ERs to reduce SUTA rates by
making voluntary contributions to state fund
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
 Retroactive wage increases
 Complete list of taxable wages found on pp 5.8 5.9
 Bonuses under supplemental compensation
plan paid upon retirement, death or disability
 Advances or reimbursement of business
 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
FUTA = 6.2% of first $7,000 of gross wages for
each employee per year
 5.4% credit against FUTA (allowed for SUTA
Therefore gross
less 5.4% credit
= .8% net FUTA
*Even if experience rating allows ER to pay a lower rate
than 5.4%
To get full 5.4% credit must have:
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
Provides unemployment compensation funds from federal
Credit is reduced (.3% per year beginning the second year after
the advance)
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
Form 940 due by 1/31 of following year
Filed annually
*If falls on Saturday, Sunday or legal holiday, have until following business day
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
Use Form 8109 coupon and deposit with an
authorized depository
940 has multiple sections
Part I - Did company pay SUTA to one state?
Part II – Calculate FUTA tax before adjustments
Part III – Determine adjustments
Part IV – Compare adjusted FUTA tax to deposits and
calculated balance due or overpayment
Part V – Report FUTA liability
Parts VI – VIII – Delineate third party designee, paid
preparer and sign
Individual may sign if sole proprietorship
 Principal officer may sign if corporation
 Duly authorized member may sign if partnership
 Fiduciary may sign if trust or estate
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
 Filed with IRS District Center in which
business is located
 Can e-file after submit electronic letter of
application to IRS
 A final return must be filed in year company
ceases doing business
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
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
Forms vary by state but may include:
Status Reports
 Initial registration with state as employer liable for
 Wage Information Report
Earnings per employee and SS# are reported
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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