Federal & State Unemployment Taxes

Learning Objective 3:

Compute the federal unemployment tax, the credit against the tax, and any credit reductions that might apply.

The employer pays to the state and federal governments an amount for each employee to partially cover the cost of any future layoff or firing. These payments are controlled by the provisions of the Federal Unemployment Tax Act (commonly called FUTA) and the State Unemployment Tax Act (commonly called SUTA).

To encourage states to create their own fair and effective unemployment compensation programs, FUTA levies a per-employee tax on the employer, but this tax is reduced by all or a portion of any tax paid to the individual state where the employee is employed.

Review this process, look at the FUTA-SUTA.PPTX then come back to answer the questions below.

To review, Step 1 is to calculate the total taxable FUTA wages. Normally, this tax is applied to the first $ of each employees wages.

Once you have totaled FUTA-taxable wages, apply the current FUTA rate of % to compute gross FUTA tax for the year.

Next you determine SUTA-taxable wages (usually the same as FUTA-taxable wages) and apply a credit of up to %. Subtract that credit from the gross FUTA tax and you have computed the net FUTA tax due.

Learning Objective 4:

Describe how an experience-rating system is used in determining employers' contributions to state unemployment compensation funds.

The reality of the business world is that some companies have stable workforces and some have a history of employment ups and downs. Workers are hired and laid off with rises and falls in the business cycle or the company's level of success. In theory, employers with stable workforce histories are not as big a drain on state and federal unemployment funds as are companies with a more up-and-down record.

The experience rating approach uses a company's historic track record of hiring and termination as an estimate for the future risk to the state's unemployment fund. Under the each state's unemployment laws (often called SUTA), the individual states implement this concept in slightly different ways.

In addition to varying the tax rate for each individual company based on their employment history, many states also vary the annual rate charged based on the condition of the entire state unemployment fund. In other words, they look at total experience rating for all companies to make sure there is enough in the fund to cover expected unemployment benefits.

In this first step, you will review the experience rating and reserve ratio concepts. In the subsequent steps, you will apply these to two actual state tables to apply the concept.

The determination of experience rating first involves the calculation of the "reserve ratio", which is usually defined as shown below. Roll your mouse over the underlined terms to see a more complete definition:

Reserve ratio	=	Contributions - Benefits paid
		Average payroll

Look carefully at the top two terms in the equation above. In most states each employer has an individual "reserve account" into which taxes are paid and benefits are withdrawn over time, like a savings account. So another way to express the reserve ratio is compare the size of that reserve account with the size of the payroll. How would you express the calculation above in terms of the company's reserve account balance?

Elsinore Construction Company has paid $11200.00 in unemployment taxes to its state to date, while being charged $215000 in benefits paid out over that same period. Elsinore's average payroll is 9050000, and state taxable wages for this period are 7440000.

Below is the state unemployment tax table for this year for each range of reserve ratios:

Reserve Ratio	Rate	Reserve Ratio	Rate	Reserve Ratio	Rate
17% and over	0.50%	7.00% to 7.99%	2.20%	-6.00% to -8.99%	5.20%
16.00% to 15.99%	0.60%	6.00% to 6.99%	2.50%	-9.00% to -11.99%	5.30%
15.00% to 14.99%	0.70%	5.00% to 5.99%	2.80%	-12.00% to -14.99%	5.40%
13.00% to 13.99%	0.80%	4.00% to 4.99%	3.10%	-15.00% to -19.99%	5.50%
12.00% to 12.99%	0.90%	3.00% to 3.99%	3.20%	-20.00% to -29.99%	5.60%
11.00% to 11.99%	1.00%	2.00% to 2.99%	3.30%	-30.00% to -34.99%	5.70%
10.00% to 10.99%	1.30%	1.00% to 1.99%	3.40%	-35.00% and under	5.80%
9.00% to 9.99%	1.60%	0.00% to 0.99%	3.60%
8.00% to 8.99%	1.90%	-0.00% to -5.99%	5.10%

1.a. What is Elsinore's reserve account balance? $

1.b. What is Elsinore's reserve ratio ? Round your answer to the nearest percent. %

1.c. What is Elsinore's SUTA tax rate? Round your answer to one decimal place. %

1.d. How much does Elsinore owe in SUTA taxes this year? Round your answer to the nearest dollar. $

Most states assign unemployment tax rates strictly on the individual experience of the company. This is called "fixed ranking," and is the method you used in the prior step. In this step you will look at an actual states fixed ranking tax tables.

Eleven states assign SUTA rates according to how each employers experience rating ranks when compared to the experience of other employers in the state. This is called "array ranking." You will see an actual array ranking state's tax tables in the step following this one.

One more real-world complication is that many states have added factors to their tax tables which take into consideration the overall health of the state's unemployment fund. If the fund is running low and demand for benefits is high, the state has a formula for temporarily raising the SUTA rates to make up the shortfall.

In this step you will look at how the state of California has handled this issue in recent years, and you will get a chance to apply your understanding of experience rating to this case. California performs an annual grading of the state unemployment fund balance, compared with the total payroll in the state, and assigns a letter grade for the year, as shown by this table:

Balance of the UI Fund on September 30		Percentage
Gross wages reported by all employers	=	to determine
during the fiscal year ending on the		the rate
computation date (June 30)		schedule
This calculation establishes the rate schedule as follows:

PERCENTAGE		CONTRIBUTION RATE SCHEDULES
Greater than:	Equal to or less than:
1.8		AA
1.6	1.8	A
1.4	1.6	B
1.2	1.4	C
1.0	1.2	D
0.8 (or equal to)	1.0	E
0.6 (or equal to)	0.799	F

If you need to calculate SUTA taxes in California, you first need to find out the letter grade for the state for the current year. For this exercise, assume that the unemployment insurance (UI) fund balance, divided by gross reported wages, yields a factor of 1.35%. This means that your calculation of taxes due for this year needs to refer to Contribution Rate Schedule

See the file CA UI Tax Rate Schedule.xlsx to see a recent actual California SUTA tax schedule. Note how both the experience rating concept and the annual UI fund grading are implemented as rows and columns in the table.

2.a. Arcata Facility Services, Inc., has a reserve ratio of -0.07. The taxable payroll for the year is $235400. Using the table in the link above, and the correct schedule also determined above, Arcata's SUTA tax rate for this year is: %

2.b. Calculate Arcata's SUTA tax liability to the nearest cent: $

As noted in the prior step, some states assign SUTA rates according to how each employer's experience rating ranks when compared to the experience of other employers in the state. This is called "array ranking."

Iowa is an example of an array ranking state. Let's see if you can apply your knowledge of experience ranking to figure out how to adapt to Iowa's SUTA system.

In Iowa's case, the reserve ratio formula is changed slightly to eliminate the employer contributions, which they call the "benefit ratio."

Benefit ratio	=	5-year average benefits paid
		5-year average payroll

The goal of the company is to get a benefit ratio score as LOW as possible. Note that a company can achieve a lower score in two different ways. First, it can work to get its amount of benefit claims through fewer layoffs and firings. Or alternatively, the company can work to get its average payroll, through adding new workers. Both of these actions benefit the states total workforce and economy.

The state then accumulates the benefit ratios of all employers in the state (a special rate applies for companies with less than five years of history), and groups them from low-to-high into 21 ranks. This is the "array ranking," as shown in the rows of the SUTA tax table below.

Benefit Ratio Rank	Approximate Cumulative Taxable Payroll Limit	Contribution Rates Table
		1	2	3	4	5	6	7	8
1	4.8	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
2	9.5	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
3	14.3	0.1	0.1	0.1	0.1	0.1	0.0	0.0	0.0
4	19.0	0.4	0.3	0.3	0.2	0.1	0.1	0.1	0.1
5	23.8	0.6	0.5	0.4	0.3	0.3	0.2	0.1	0.1
6	28.6	0.9	0.8	0.6	0.5	0.4	0.3	0.2	0.1
7	33.3	1.2	1.0	0.8	0.6	0.5	0.4	0.3	0.2
8	38.1	1.5	1.3	1.0	0.8	0.6	0.5	0.3	0.2
9	42.8	1.9	1.5	1.2	0.9	0.7	0.6	0.4	0.3
10	47.6	2.1	1.8	1.4	1.1	0.8	0.6	0.5	0.3
11	52.4	2.5	2.0	1.6	1.3	1.0	0.7	0.5	0.3
12	57.1	3.0	2.4	1.9	1.5	1.1	0.9	0.6	0.4
13	61.9	3.6	2.9	2.4	1.8	1.4	1.1	0.8	0.5
14	66.6	4.4	3.6	2.9	2.2	1.7	1.3	1.0	0.6
15	71.4	5.3	4.3	3.5	2.7	2.0	1.6	1.1	0.7
16	76.2	6.3	5.2	4.1	3.2	2.4	1.9	1.4	0.9
17	80.9	7.0	6.4	5.2	4.0	3.0	2.3	1.7	1.1
18	85.7	7.5	7.5	7.0	5.4	4.1	3.1	2.3	1.5
19	90.4	8.0	8.0	8.0	7.3	5.6	4.2	3.1	2.0
20	95.2	8.5	8.5	8.5	8.0	7.6	5.8	4.3	2.8
21	100.0	9.0	9.0	9.0	9.0	8.5	8.0	7.5	7.0

Like the California example of the prior step in this exercise, Iowa also has varying rate columns, using numbered grades rather than letter grades, to adjust the rates depending on the health of the UI fund. A higher column number means a poorer "grade." Examine the table to see if you can determine the financial incentive that a company has, especially in years when the fund is not healthy, to move lower in the benefit ratio ranking.

3.a. Creston Biofuels, Inc., has a benefit ratio rank of 11. For this tax year, Contribution Rate Table column 3 is to be used. The taxable payroll for the year is $325300. Using the table above, Crestons SUTA tax rate for this year is: %

3.b. Calculate Creston Biofuel's SUTA tax liability to the nearest cent: $

Note: For this problem, the rate 0.6% was used for the FUTA tax rate for employers.

4. As the accountant for Runson Moving Company, you are preparing the company's annual return, Form 940 and Schedule A. Use the following information to complete Form 940 and Schedule A.

The net FUTA tax liability for each quarter of 2017 was as follows: 1st, $215.20; 2nd, $107.90; 3rd, $97.20; and 4th, $51.96 plus the credit reduction.

Since the net FUTA tax liability did not exceed $500 until the 4th quarter, the company was required to make its first deposit of FUTA taxes on January 31, 2018. Assume that the electronic payment was made on time.

a. One of the employees performs all of his duties in another state-Arizona.

b. Total payments made to employees during calendar year 2017:

California	$100,000
Arizona	18,660
Total	$118,660

c. Employer contributions in California into employees' 401(k) retirement plan: $3,450.

d. Payments made to employees in excess of $7,000: $36,500 ($11,660 from Arizona and $24,840 from California).

e. Form is to be signed by Mickey Vixon, Vice President.

f. Phone number - (219) 555-8310.

If an input box does not require an entry, leave it blank. When required, round amounts to the nearest cent.

Form940 for 20--:	Employer's Annual Federal Unemployment (FUTA) Tax Return
	Department of the Treasury Internal Revenue Service	OMB No. 1545-0028

Employer identification number (EIN)

0

0

0

0

0

3

7

9

3

Name (not your trade name)

RUNSON MOVING COMPANY

Trade name (if any)

Address

423 BRISTOL PIKE

Number

Street

Suite or room number

SACRAMENTO

CA

94203-4523

City

State

ZIP code

Foreign country name

Foreign province/county

Foreign postal code

Type of Return (Select one.)

Instructions and prior-year forms are available at www.irs.gov/form940.

Read the separate instructions before you fill out this form. Please type or print within the boxes.

Part 1:

Tell us about your return. If any line does NOT apply, leave it blank.

1a

If you had to pay state unemployment tax in one state only, enter the state abbreviation . . . . . . . . . .

1a

1b

If you had to pay state unemployment tax in more than one state, you are a multi-state employer . . .

1b

Check here. Complete Schedule A (Form 940).

2

If you paid wages in a state that is subject to CREDIT REDUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

Check here. Complete Schedule A (Form 940).

Part 2:

Determine your FUTA tax before adjustments. If any line does NOT apply, leave it blank.

3	Total payments to all employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		3
4	Payments exempt from FUTA tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
	Select:
5	Total of payments made to each employee in excess of $7,000 . . . . . . . . . . . .	5
6	Subtotal (line 4 + line 5 = line 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		6
7	Total taxable FUTA wages (line 3 line 6 = line 7) (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . .		7
8	FUTA tax before adjustments (line 7 x .006 = line 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		8

Part 3:

Determine your adjustments. If any line does NOT apply, leave it blank.

9	If ALL of the taxable FUTA wages you paid were excluded from state unemployment tax, multiply line 7 by .054 (line 7 x .054 = line 9). Go to line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
10	If SOME of the taxable FUTA wages you paid were excluded from state unemployment tax, OR you paid ANY state unemployment tax late (after the due date for filing Form 940), complete the worksheet in the instructions. Enter the amount from line 7 of the worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
11	If credit reduction applies, enter the total from Schedule A (Form 940) . . . . . . . . . . . . . . . . . . . . . . . . . . .	11

Part 4:

Determine your FUTA tax and balance due or overpayment. If any line does NOT apply, leave it blank.

12

Total FUTA tax after adjustments (lines 8 + 9 + 10 + 11 = line 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

13

FUTA tax deposited for the year, including any overpayment applied from a prior year . . . . . . . . . . .

13

14

Balance due (If line 12 is more than line 13, enter the excess on line 14.) If line 14 is more than $500, you must deposit your tax. If line 14 is $500 or less, you may pay with this return. (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . .

14

15

Overpayment (If line 13 is more than line 12, enter the excess on line 15 and check a box below.) . . . . . . . .

15

You MUST complete both pages of this form and SIGN it.

Check one:

Apply to next return.

Send a refund.

Next

For Privacy Act and Paperwork Reduction Act Notice, see the back of Form 940-V, Payment Voucher.

Cat. No. 11234O

Form 940 (2015)

Name (not your trade name)	Employer identification number (EIN)
RUNSON MOVING COMPANY	00-0003793

Part 5:

Report your FUTA tax liability by quarter only if line 12 is more than $500. If not, go to Part 6.

16	Report the amount of your FUTA tax liability for each quarter; do NOT enter the amount you deposited. If you had no liability for a quarter, leave the line blank.
	16a 1st quarter (January 1 March 31) . . . . . . . . . . . . . . . . . . . . . . . . .	16a
	16b 2nd quarter (April 1 June 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16b
	16c 3rd quarter (July 1 September 30) . . . . . . . . . . . . . . . . . . . . . . . . .	16c
	16d 4th quarter (October 1 December 31). . . . . . . . . . . . . . . . . . . . . . .	16d
17	Total tax liability for the year (lines 16a + 16b + 16c + 16d = line 17)	17		Total must equal line 12.

Part 6:

May we speak with your third-party designee?

Do you want to allow an employee, a paid tax preparer, or another person to discuss this return with the IRS? See the instructions for details.

Designee's name and phone number

Select a 5-digit Personal Identification Number (PIN) to use when talking to IRS

Part 7:

Sign here. You MUST fill out both pages of this form and SIGN it.

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete, and that no part of any payment made to a state unemployment fund claimed as a credit was, or is to be, deducted from the payments made to employees. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Sign your name here

Print your name here

Print your title here

Date

1/31/18

Best daytime phone

219-555-8310

Paid Preparer Use Only

Check if you are self-employed . . . .

Preparer's name

PTIN

Preparer's signature

Date

/ /

Firm's name (or yours if self-employed)

EIN

Address

Phone

City

State

ZIP code

Page 2

Form 940 (2015) Source: Internal Revenue Service

Schedule A (Form 940) for 20--:
Multi-State Employer and Credit Reduction Information Department of the Treasury Internal Revenue Service	OMB No. 1545-0028

Employer identification number (EIN)

0

0

0

0

0

3

7

9

3

Name (not your trade name)

Runson Moving Company

Place an X in the box of EVERY state in which you had to pay state unemployment tax this year. For each state with a credit reduction rate greater than zero, enter the FUTA taxable wages, multiply by the reduction rate, and enter the credit reduction amount. Don't include in the FUTA Taxable Wages box wages that were excluded from state unemployment tax (see the instructions for Step 2). If any states don't apply to you, leave them blank.
Postal Abbreviation	FUTA Taxable Wages	Reduction Rate	Credit Reduction	Postal Abbreviation	FUTA Taxable Wages	Reduction Rate	Credit Reduction
AK		.000		NC		.000
AL		.000		ND		.000
AR		.000		NE		.000
AZ		.000		NH		.000
CA		.015		NJ		.000
CO		.000		NM		.000
CT		.021		NV		.000
DC		.000		NY		.000
DE		.000		OH		.015
FL		.000		OK		.000
GA		.000		OR		.000
HI		.000		PA		.000
IA		.000		RI		.000
ID		.000		SC		.000
IL		.000		SD		.000
IN		.000		TN		.000
KS		.000		TX		.000
KY		.000		UT		.000
LA		.000		VA		.000
MA		.000		VT		.000
MD		.000		WA		.000
ME		.000		WI		.000
MI		.000		WV		.000
MN		.000		WY		.000
MO		.000		PR		.000
MS		.000		VI		.015
MT		.000

Total Credit Reduction. Add all amounts shown in the Credit Reduction boxes. Enter the total here and on Form 940, line 11 . .

For Privacy Act and Paperwork Reduction Act Notice, see the Instructions for Form 940.

Cat. No. 16997C

Schedule A (Form 940) 2015 Source: Internal Revenue Service