Mary Kazmierczak, CPPRachel Brooks, CPP

• Federal Unemployment Tax– Who pays FUTA– Exempt wages– Exempt Employment– FUTA Tax Rate & Wage Base– Depositing & Reporting FUTA tax– Calculating the State Credits – Form 940– Penalties for noncompliance

• State Unemployment Insurance– Employment Relationship– SUI Taxable wages– Contribution rates & Experience rates– Voluntary Contributions– Joint or combined accounts– Unemployment Benefits Process– Reporting Requirements

• State Disability Insurance

Who must pay FUTA?•Nonfarm employers paying $1,500 or more in covered wages in any calendar quarter (current or preceding year)

•Nonfarm employers employing at least one employee for at least one day in 20 different weeks(not consecutive) (current or preceding year

•Farm employers paying $20,000 or more in covered wages in any calendar quarter (current or preceding year)

•Farm employers employing at least 10 employees for at least part of one day in 20 different weeks(not consecutive) (current or preceding year)

•Employers paying domestic employees $1,000 or more in any calendar quarter (current or preceding year) incl. private home, college club, fraternity or sorority

Who does not pay FUTA

Easier to say who does not pay. . .

•Federal, State and Local government employees including Indian Tribes

•Nonprofit, religious, charitable or educational organizations that are tax exempt

Exempt Wages• Sick or disability benefits paid

more than six calendar months• Sickness or injury payments made

under a state workers comp law• Payments made under a 125 flex

plan-other than adoption or deferred compensation

• Noncash payments for work outside the employers business

• Qualified moving expense• Death or disability retirement

benefits

• Noncash payments to agricultural workers

• Reimbursement or provision for educational or dependent care assistance

• The value of GTL(entire amount )• Value of deductible meals &

lodging provided by employer• Wages paid to a beneficiary after

the year of an employees death• Tips not reported by an employee

Exempt Employment Types

• Federal, state, local government employers incl. political subdivisions

• Work on a foreign ship outside U.S.• Work by full time students at the

school they are attending• Work for a foreign government or

international organization• Student nurses or hospital interns• Insurance agents, commission only• Newspaper deliverers under 18

• Non immigrant aliens under F, J, M or Q visas

• Work for a spouse or child• Work performed by a child under

21 for their parents• Work by inmates of a penal

institution• Work by election worker paid <

$1500 in 2009• Alien agricultural workers under an

H-2A visa• Statutory nonemployees

FUTA Tax Rate / Wage BaseFUTA Tax rate is 6.2% Comprised of : 6.0 % permanent rate.2% Surcharge

Rate is applied to theFirst $7,000 of an employee’sCovered wages

Tax is employer paidSome states have Employee contributionsMandated.

If employers pay their state unemployment taxes in full and on time A Credit up to 5.4% can be takenFull credit allows for tax calculation to be .8 % Maximum paid $7.000 x .8% = $56.00 per employee

Payment by successor companies based on the company application of the Social Security tax payment – however both predecessor and successor must be covered under FUTA.

Common paymaster companies follow the same practice as the withholding and payments for Social Security and Medicare

Depositing & Paying FUTA Tax

Employers can assume the credit for the first three quarters of a calendar year Thus multiplying wages by .058% --up to $7,000 wage base limit or $56.00If amount for all employees is $500 or greater then the deposit is due respectively1st quarter--- April 302nd quarter-- July 313rd quarter – October 31If under $500 then the amount need not be deposited but carry over to the next quarter until the threshold of $500 is met .

The final quarter when filing the 940 and annual liability is reviewed:Employer verifies the actual credit percentageAdjusts if any difference necessaryVerifies 4th quarter liability if < $500 then can be paid with the 940 by January 31 if > $500 must be paid separately by January 31

Calculating the credit

Two types of credit scenarios are available:90% or normal credit- 5.4 %Additional credit – utilize the lesser rate of the state

Regardless of which option used:State must have “certified unemployment insurance program” The credit utilized cannot exceed the 5.4%

90% or normal credit

To claim the full 5.4% credit all deposits due must be made as required by law with the final payment being no later than when filing the 940.All State unemployment payments must be made timely… if sent to wrong state, proof of timely submission will allow the credit.

If payment is late to the state employer must calculate the liability as:

Annual Liability amount $1600. –Paid $1000 timely -- $600 late

Timely state payment $1000 x 100% = $1000.Late state payment $600.00 x 90% = $540.00Total credit on the liability = $1540.00

Additional Credit allowanceIf an employer has a state unemployment rate that is less than 5.4 %, the

employer receives a credit for the difference between the FUTA credit of 5.4% and the state unemployment rate.

Example: state unemployment rate is 3.6%The credit is 5.4 % - 3.6% = 1.8% x FUTA taxable wages

Credit reductionsState loans for UI

• States that have high unemployment, may borrow funds from the federal agency to assist in benefit payments.

• The loans must be repaid by the end of the following year to avoid a credit reduction

• If the loan is not paid in full then a .3 % reduction is imposed new credit rate to be 1.1%.

• The credit reduction can be avoided should certain criteria be met as of November 10:– Solvency of the unemployment system– Company ability to complete the payment timely– No further necessity to borrow

Form 940Annual filing form showing the company's FUTA liability.Due date is January 31st following the year of the liabilitiesAll forms must be signed owner, president, vice president, principal corporate officer, authorized partner or fiduciary Delivery must be made by mail, delivery service or hand delivered to The company’s appropriate office , assigned based on where the business Is located, of if payment is accompanying the form.

Amended 940

Amended 940 – Resend the corrected form with the box checked that is labeled “Amended ”Statement of reason for amendment Certification from state for credit allowance or credit reduction

If overpayment is claimed:Attach file 843—Claim for Refund and Request for Abatement

Additional notes :

Successor company – needs to file and check the box labeled “Successor Employer”

Out of Business – need to file, pay and check the box labeled “Final: Business closed orNot paying wages”

Line by Line

General filing information:Business name and EIN must be on the top of each pageIf paper form must use a 12 point Courier pointDollars posted to the left and cents to the right of the decimal Do not use dollar signs or decimals—commas are optionalAmounts on the form may be rounded If rounding – must be consistentDo not post 0(zero) leave blank If applicable ensure to check the necessary box

Line by LinePart 1, Line 1a– State abbreviationPart 1, Line 1b – Multi-State employer Check box

Must complete Part 1 of Schedule APart 1, Line 2 – Credit reduction status check box

Must complete Part 2 of Schedule A

Part 2, Line 3 – Total payments to all employees (all wages)Part 2, Line 4– Payments exempt from FUTAIf amount on line 4 must check the applicable boxes 40a- 4e

4a-Fringe benefits4b- Group Term Life4c – Retirement / Pension4d – Dependent care4e – Other – agriculture, visas, workers comp, etc

Part 2, Line 5—Total of payments made to each employee in excess $7,000Part 2, Line 6– Subtotal –Total of exempt payments (line 4+ 5)Part 2, Line 7 – Total taxable FUTA wages (line 3-6)Part2, Line 8 – FUTA tax before adjustments- (Line7 x.08)

Line by LinePart 3, Line 9 – If all FUTA wages paid were exempt from SUI—Must pay those wages at full 6.2% ( line 7 x 5.4%)Part 3, Line 10 –If some FUTA wages paid were exempt from SUI or paid lateComplete the worksheet and transfer line 7 into line 10 on 940Part 3, Line 11– If credit reduction applies—transfer line 3 from Schedule A to Line 11 on the 940

Part 4, line 12 – Total FUTA taxes after adjustments– (add lines 8-11)Part4, Line 13 –FUTA tax deposited for the yearPart 4 Line 14– Balance due (line 12-13)Part 4, Line 15 –Overpayment (line 13-12)

Line by LinePart 5 – Report your FUTA tax liability by quarter only if line 12 is >$500Part 5, Line 16 – Report the FUTA tax liability for each quarter

This is liability not deposit amountsPart 5, Line 17 - Total tax liability for the year (add lines 16a- 16d

Part 6 – May we speak with your third party designee? Designee may

Give the IRS any information that is missing from the formAsk the IRS for any additional information about processing the formRespond to certain IRS notices—math errors & processing form

Designee may notReceive refundsBind employer to anythingNor represent the employer before the IRS

Part 7– Sign here--- Must be signed Paid preparer’s use only– Vendor that has completed the form

Schedule A940 V

Schedule A -- Multi-State employer and Credit Reduction Information

Part 1, Line 1– Check box for every state in which you were required to pay SUI taxPart 2 Line 2 – Total Credit reduction – (add lines 2b,2d,2f,2h,2j) There are no credit reduction states for 2008 thus this area need not be completed

940-V– Form 940 Payment Voucher

Utilized only when making payment with the 940.Credit card payments or wire amounts can be made with one of two authorized service providers, that have obtained prior approval.Payments can be made 24/7.Payments made via phone or internetProvider charges a fee based on amount of payment

Penalties for FUTA Noncompliance

Late filing of Form 940– addition to tax5% if the amount of tax required to be shown on the return( reduced by timely Deposits and credits) for each month or fraction of month return is lateMaximum of 25%

If fraudulent return– amounts increase to 15% up to a maximum of 75%

Failure to pay FUTA tax- addition to tax5% if the amount of tax required to be shown on the return( reduced by credits) for each month or fraction of month payment is late to a max of 25%An additional .5% on the amount if notice or demand is issued and notPaid within 21 days (10 days if amount is at least $100,000) up to a max of 25%

If not paid percentage increases to 1% -- if not paid within 10 days- demand notice issued with one day to pay or levy issued to company signer.

Penalties for Noncompliance

Failure to file and pay – an additional .5% Assessed if both late deposit and late filing

Reasonable cause—Affirmative statement under penalty of perjury that the employerExercised ordinary business care and prudence and could still not pay or file.

Accuracy related penalty – understating the amount or mathematical errors result in a 20% penalty on the difference of the error

Failure to make timely deposits- if not deemed willful neglect or approved as reasonable cause.. Additional late penalty is assessed based on a four tier scale

2% if the undeposited amount is paid within 5 days of due date5% if the undepositted amount is paid within 6-15 days of the due date10% if the undeposited amount is paid more than 15 days after the due date15% of the undeposited amount in not paid within 10 days of notice

STATE UNEMPLOYMENT INSURANCE

State Unemployment Insurance

Applicable for employees not independent contractorsEach state sets there own wage base and rate

Employers conducting business or services in multiple states need to allocate for unemployment purposesFour factors when allocating:1.Are services localized? – one primary location and other state activity is incidental, temporary2.Does the employee have a base of operation? - office, reports to corporate office , etc3.Is there a Place of Direction or control? – no localization, no office , results to their superior where direction will be communicated4.What is the employees state of residence? – In rare cases where none of the aforementioned apply. .. The employee’s residential state is to be utilized.

Reciprocal agreements allow for employers to choose one state for payment when the employee frequents between the states.

Contribution Rates & Experience Rating

Contribution rate is the rate a employer applies to its taxable payroll for each employee up to a state determined wage base limit

Experience rating is the assessment of the contribution rate based on the employers average annual taxable wages and unemployment benefits charged.

Methods to determine Experience rate

Reserve Ratio – primarily used – account assigned for company payments and reduced based on benefits charged

Reserve Ratio = Unemployment taxes paid – Benefits charged Average Taxable Payroll

Benefit Ratio- 2nd most used formula - Benefit Ratio = Benefits charged / Total taxable payroll

Benefit wage ratio method – Used in Delaware an OklahomaBenefit wage ratio = Benefit wages paid / Total taxable payroll

Payroll Stabilization – Alaska only state to utilizeFluctuation in payroll from quarter to quarter either increases or decreases the rate

Surcharges may be assessed if the state is experiencing high unemployment, or has federal loan assistance. The surcharge may or may

not play a factor depending of the reason it was established.

SUTA Dumping Prevention Act 2004Law created to eliminate the Shell scam of creating a bogus company and transferring its employees to the newly created company, with a lower tax rate, and thus paying less UI and allowing its company’s higher rate to decrease.

Law mandated each state put in place processes around the below four factors:Failure to have these controls will prohibit the state to be certified under the FUTA Act.

•Mandatory transfers– transfer between co-companies to benefit on UI•Prohibited transfers—new company cannot utilize the lower rate, a new company rate must be provided.•Penalties for SUTA Dumping– must have meaningful civil and criminal penalties•Procedures for identifying and processing SUTA Dumping

Noteworthy SUI Non- profit and public sector generally follow one of two options

•Direct reimbursement—Employer reimburses the state directly for any unemployment benefits •Choose to become experience rated (rare)

Employee contributions:Three states have plans that enforce a minute amount be contributed from the employee

Pennsylvania– Alaska--- New Jersey ( PAN)

Voluntary Contributions- 27 states can make additional payments into the fund account– States have strict guidelines and timetables

Unemployment Benefit Process

State Dept of Labor– places guidelines and conditions around granting Unemployment Benefits

Know that the terminated employees wages earned In the base period are the Factors utilized in calculation the benefit.

Part time employees can get benefits.

Normal allowance is 26 weeks– Stimulus changed and extended the period

Very interesting to understand but no in depth necessary for testing.

Auditing and Challenging Benefit Claims

One means that company’s can lower their expenditures for unemployment :Conduct account auditing and challenge claims in efforts to alleviate some expenses.

Heartless. .. But businesses do it an even pay for services to be the bully.

Multiple Worksite ReportingAdditional mandatory quarterly filing when an employer has multiple worksites.MWR breaks down the employment and wages by locality and industry.Filed to the State Employment Security agency.The Employment security agency in turn must file it with the Federal Bureau of Labor

Mandatory vs. Voluntary reporting– this references the information that must be contained within the MWR to states vs. Involuntary where an employer reports to BLS.

Standardization of the form has streamlined the process.Mandatory MWR employers :Uses one unemployment insurance account number for all its employeesHas more than on worksite, or conducts multiple activitiesHas a total of at least 10 employees at all its secondary locations

Magnetic filing and internet options can be obtained at the BLS website and publications

Look for many changes for 2010Thank you