Sec 7: Unemployment Insurance Flashcards
Federal Unemployment Insurance - Federal Unemployment Tax Act (FUTA) - Who Must Pay
- Nonfarm employers paying $1,500 or more in covered wages in any calendar quarter (1/1–3/31, 4/1–6/30, 7/1–9/30, 10/1–12/31) during the current or preceding calendar year
- Nonfarm employers employing at least one employee for at least part of one day in 20 different weeks (not necessarily consecutive) during the current or preceding calendar year
- Farm employers paying $20,000 or more in covered wages in any calendar quarter during the current or preceding calendar year
- Farm employers employing at least 10 employees for at least part of one day in 20 different weeks (not necessarily consecutive) during the current or preceding calendar year
- Employers paying domestic employees $1,000 or more in any calendar quarter of the current or preceding calendar year for work performed in a private home, local college club, fraternity, or
sorority
Entities not subject to FUTA
- Federal, state, and local government employers, including their political subdivisions, and Indian tribes
- Nonprofit religious, charitable, or educational organizations that are tax-exempt
What Wages Are Exempt From FUTA Tax
- Sick or disability benefits paid more than six calendar months after the last month the employee worked for the employer
- Sickness or injury payments made under a state workers’ compensation law or a law in the nature
of a workers’ compensation law - Payments made under a deferred compensation plan, except elective deferrals to the plan
- Payments made under a S125 flexible benefits plan
deferrals to a deferred compensation plan and payments made under an adoption assistance plan - Noncash payments to an employee for work done outside the employer’s trade or business
- Qualified moving expense reimbursements (The exclusion has been suspended for tax years 2018 through 2025. The suspension, however, does not apply to certain moves of American military
personnel. - Death or disability retirement benefits
- Noncash payments to agricultural workers
- Reimbursement for or provision of excluded educational or dependent care assistance
- The value of group-term life insurance coverage (including the amount over $50,000)
- The value of deductible meals and lodging provided by the employer
- Wages paid to a beneficiary after the year of an employee’s death
- Tips not reported by an employee to an employer (generally if less than $20 a month)
What Types of Employment Are Exempt from FUTA Tax?
- Work performed for a federal, state, or local government employer, including political
subdivisions - Work on a foreign ship outside the U.S.
- Work done by full-time students for the school where they attend classes or for an organized camp
- Work done for a foreign government or an international organization (e.g., NATO, the United Nations)
- Work performed as student nurses or hospital interns
- Insurance agents who receive only commissions
- Newspaper deliverers under age 18 who deliver directly to customers
- Certain nonimmigrant aliens working under F, J, M or Q visas
- Work performed for a spouse or child
- Work performed by a child under age 21 for his or her parents
- Work performed by an inmate of a penal institution
- Work performed by an election worker who is paid less than $2,300 in 2024 (adjusted annually for inflation)
- Work performed by alien agricultural workers under an H-2A visa
- Work performed by statutory nonemployees
FUTA Tax Rate and Wage Base
FUTA tax at the rate of 6.0%. The rate is applied to the first
$7,000 of an employee’s covered wages in a calendar year
But most employers do not pay the full 6.0%. If they pay their state unemployment taxes in full and on time, employers can receive a credit against their FUTA tax rate of up to 5.4%. Employers receiving the full credit have an effective FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%) and pay $42 for each employee receiving at least $7,000 of covered wages ($7,000 x .006 = $42).
Depositing and Paying FUTA Tax
ER’s must assume they have the credit of 5.4% at least for the first three calendar quarters of the year. Taxable wages for quarter x .006 = quarterly FUTA liability
if the employer owes more than $500, the full amount must be deposited by the last day of the month following the end of the quarter. The deposit due dates are:
First quarter ends March 31 Deposit due April 30
Second quarter ends June 30 Deposit due July 31
Third quarter ends September 30 Deposit due October 31
Calculating the State Credits Against FUTA Tax Liability
Two types of credits. 90% or normal credit and Additional Credit
“90%” or “normal” credit
The normal credit against FUTA tax liability equals the amount of an employer’s required contributions paid timely into a certified state unemployment insurance fund. It is also called the 90% credit because the amount of the credit is limited to 90% of the 6.0% FUTA tax rate— 5.4%.
Additional Credit
In order to allow employers with lower unemployment tax rates (based on their more stable employment history) to receive the same credit against FUTA tax liability as other employers, these lower rate employers are granted an additional credit equal to the difference between their tax rate and 5.4%. When added to
the normal credit, the total credit cannot exceed 5.4%. The availability of the additional credit does not depend on the timeliness of the employer’s state tax payments.
Penalties for not paying
- 5% of any unpaid tax shown on the return (after accounting for credits) for each month or fraction of a month that the payment is late, up to a maximum of 25%
- An additional 0.5% per month of any unpaid tax that is not shown on the return but for which the IRS has issued a notice and demand, if the tax is not paid within 21 calendar days of the notice
and demand (10 business days if the amount is at least $100,000), up to a maximum of 25%
Penalties for not filing
results in an “addition to tax,” the amount of which depends on how late the return is filed. The amount is 5% of the amount of tax required to be shown on the return ofr each month or fraction of month up to 25% max.
How does an ER amend an incorrect Form 940?
Amended return. They do this by filing a new Form940 for the year being amended with the correct numbers. Boxa in the upper right corner of page 1 indicating an amended return should be checked. The form should be accompanied by a statement as to
why the amended return is necessary.
State Unemployment
Coverage: State unemployment insurance programs vary but follow the guidelines of the FUTA. Employers in a state covered by FUTA are generally also covered by state laws.
Four factors in determining which state an EE should be allocated for unemployment
Are services localized?
Does the employee have a base of operations?
Is there a place of direct control?
What is the EE’s state of residence?
Contribution Rate
The contribution rate is the rate an employer applies to its taxable payroll (total of taxable wages for each employee) to determine the amount of unemployment taxes it must pay. The rate is determined by the employer’s “experience rating,” which is based on the employer’s unemployment benefit charges and average annual taxable payroll. Use 4 methods to calculate experience rate: reserve ratio, benefit ratio, benefit wage ratio and payroll stabilization
Reserve Ratio
Used by majority of states. each employer
is assigned an account, into which it pays unemployment taxes. The account is then reduced by the amount of unemployment benefits paid to the employer’s former employees during the year. The reserve ratio is the balance (reserve) in the employer’s account divided by the employer’s average taxable payroll for a specific period of years (usually three), expressed as a percentage.
reserve ratio = Unemployment taxes paid - benefits charged/average taxable payroll
Benefit Ratio method
benefits charged/total taxable payroll
Benefit wage ratio
benefit wages paid/total taxable payroll
Payroll stabilization
Alaska is the only state that uses this method. Under this method, an employer’s tax rate is determined by fluctuations in its payroll from quarter to quarter and year to year. Therefore, as more employees are terminated and the payroll decreases, the employer’s tax
rate increases. So long as the employer’s payroll remains stable or increases, its tax rate will not be increased and may be decreased.
Surcharge and Assessments
When a state has more than ordinary benefit costs (e.g., payments on federal loans, extended benefits in times of high unemployment, added training expenses), it may pass those costs on in the form of a surtax or assessment on employers built into the contribution rate.
SUTA Dumping Prevention Act was designed to stop rate manipulation
stopping “businesses from wrongly manipulating their corporate
structure to avoid paying their fair share of state unemployment taxes.”
Eligibility for benefits for EE’s
- Earning a certain amount of wages in the “base period”
- Being involuntarily unemployed for reasons other than misconduct connected with their work
- Filing a claim for benefits
- Registering for work with the state employment security office
- Being physically and mentally able to work
- Be looking for and available for work (other than during times of job training or jury duty)
- Not being unemployed because of a labor dispute other than a lockout
- Being truthful in applying for benefits
The period for which a terminated employee is eligible to claim benefits is known as the
Benefit year and it begins when the EE files a claim for benefits. Can be collected up to 26 weeks. The amount of a claimant’s benefit entitlement depends on the wages earned by the terminated employee during the base period and the state’s formula for calculating benefits
Multiple worksite reporting
Employers with more than one worksite must not only file contribution and wage reports with each state, they must also file quarterly employment and wage reports with the state employment
security agency that break down the information by industry and locality
State Disability Insurance
Five states (California, Hawaii, New Jersey, New York, and Rhode Island) plus Puerto Rico provide benefits to employees who are temporarily disabled by a nonwork- related illness or injury through a tax- supported state fund
States that offer the voluntary contribution option routinely impose restrictions on its use. What classifications of employers are often barred from making such contributions?
- New employers
- Negative reserve balance employers,
- Employers that have not paid state taxes on time
What is a FUTA credit reduction state?
If the loan is not repaid by November 10 of the year the reduction is scheduled to take effect, a credit reduction of 0.3% goes into effect, with employers in that state having their effective
FUTA tax rate increased to 0.9% (0.6% + 0.3%).
Nonprofit and public sector employers must choose what for their state unemployment insurance liability?
Nonprofit and public sector employers may choose the direct reimbursement method or the experience‑rated method to satisfy their state unemployment insurance liability.
When is the base period for claiming unemployment benefits?
In most states, the base period for claiming unemployment benefits is the first four calendar quarters out of the five preceding the quarter during which the employee first filed the claim for
benefits.
Which ER’s must file multiple worksite report?
In states where use of the MWR is mandatory, an employer must file an MWR if it meets all of the following tests:
* Uses one unemployment insurance account number in that state for all its employees
* Has more than one worksite (or conducts multiple economic activities) in the state
* Has a total of at least 10 employees at all its secondary worksites
