Your Easy Guide to Unemployment Taxes

Your Easy Guide to Unemployment Taxes

Unemployment Taxes

Payroll is more than just calculating timecards and paying the right wages or salary. In fact, if you’re not careful, you run the risk of overpaying or underpaying employment taxes.

A big chunk of payroll goes to learning and keeping up-to-date with tax laws so you don’t miss any of your obligations, since doing so would mean criminal charges and hefty fines and penalty fees; and that’s on top of what you’re already due to pay!

Commonly overlooked payroll taxes are the federal and state unemployment insurance taxes which jointly fund the benefits received by those who have lost their jobs under the federal program called unemployment insurance.

Most employers are liable for both the federal (FUTA) and state unemployment taxes (SUTA), but the good news is, your SUTA payments can generally (Wisconsin included) be credited against the FUTA. Here’s what you need to know about them.

Federal Unemployment Tax

The federal unemployment tax (FUTA) rate is at 6%, which is applied to the first $7,000 wages paid to each employee during the year. This rate can be reduced to up to 0.6% if you paid state unemployment taxes which would entitle you to up to 5.4% of credit against your FUTA.

There are three tests to determine whether you are required to pay the FUTA: the general test, household employers test, and agriculture employers test.

  • General Test
    This test applies to wages paid on employees who are neither household nor agriculture employees. Under the general test, you are liable to pay the FUTA if:
    • You paid wages of $1,500 or more to employees in any calendar quarter during 2020 or 2021, or
    • You had one or more employees for at least some part of a day in any 20 or more different weeks. Count all full-time, part-time, and temporary employees.
  • Household Employers Test
    You are required to pay the FUTA on wages paid to household employees if they total to $1,000 or more in any calendar quarter.
  • Agriculture Employers Test
    Meanwhile, under the agriculture employers test, you are subject to the FUTA if you meet any of the following:
    • You paid cash wages of $20,000 or more to farmworkers during any calendar quarter, or
    • You employed 10 or more farmworkers during at least some part of a day (whether or not at the same time) during any 20 or more different.

When to Pay and When to File?

FUTA must be deposited through the Electronic Federal Tax Payment System (EFTPS) at least quarterly, if your liability exceeds $500 per quarter. The computation of the basis of the required quarterly payment is cumulative.

This means that if your liability is less than $500 for the present quarter, you’re not required to deposit your payment but you have to carry over the amount for next quarter’s computation. Thus, if your liability this quarter combined with that of next quarter exceed $500, then you’ll have to deposit your payment then.

Those whose liability does not go beyond the threshold can pay for their tax upon filing their annual FUTA tax return, which is reported on Form 940. The deadline for the 2022 tax year is on January 31, 2023, but if payments have already been deposited, then filing can be done until February 10, 2023.

State Unemployment Tax

State unemployment taxes are paid only by the employer, except in Alaska, New Jersey, and Pennsylvania, where employers are required to withhold additional money from employees’ wages.

The SUTA tax rate differs per state. In Wisconsin, the unemployment tax rate changes every year, so it’s important to make sure your payroll is accurate. For 2022, the wage base is $14,000, so you’ll have to apply your tax rate to this amount per employee. Here are the ranges of tax rates for this year:

Small Employers (Under $500,000 Taxable Payroll): 0% to 12%
New Small Employer – 3.05%
Large Employers (Over $500,000 Taxable Payroll): 0.5% to 12%
New Large Employer – 3.25%
New Construction Employer: 2.5% to 2.7%

Who Are Liable?

If you are liable for the FUTA, you’re most likely also liable to pay SUTA, in Wisconsin, since most of the rules to be a covered employer are the same. Here are other rules under which you will be held liable for the WI SUTA:

  • You’ve paid any wages for Wisconsin employment and you have a liability for that year under the Federal Unemployment Tax Act (FUTA);
  • You’ve taken over part or all of the business of an employer already covered under the law; or
  • You have no liability by law, but you voluntarily elected to become a covered employer (with the Department of Workforce Development’s approval).

Tax Payment and Report

Your tax payments and reports must be made and filed quarterly, every end of the month, following the third month of a calendar quarter. For example, your payment and report for the first quarter are due on April 30.

If you are a Wisconsin business that has 25 or more employees in a quarter, you are required to pay and file electronically through the Tax and Wage Reporting System.

Avoid Misclassification of Employees

The rise of the gig economy and increasing reliance on independent contractors may lead some employers into thinking that they can reduce their tax liability. However, no matter how you call them, the law may still treat these so-called “independent contractors” as employees, based on any of the three categories of degree of control and independence: behavioral control, financial control, and type of relationship.

Proper classification of workers is crucial if you want to avoid criminal penalties of up to $10,000 per misclassified worker and one year in prison.

Takeaway:

The FUTA and WI SUTA are taxes that you need to prepare for ahead of time since they are paid quarterly (in both cases) and filed as early as January 31 (FUTA), or in Wisconsin’s case, every quarter as well.

If you’re not careful, you’ll end up hurting your bottom line with penalty fees and fines, and you may even be criminally charged. This applies even if you outsource your payroll and tax compliance, so part of your responsibility is to look for a firm you can trust.

At MBE CPAs, we pride ourselves in the trust that we’ve built with our clients. We always keep our clients’ needs and wants at the forefront of everything we do so you can rely on us to do the job right and always be honest with you. Whether you want someone else to do it entirely or someone to guide you through the process, we’re here to help. Let’s de-complicate your tax preparation today!

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