Webcast Summary: Mitigating Overpayment of Employment Taxes
The following employment taxes are assessed against employers up to annual taxable wage base limits:
- FICA (social security): 6.20% on the first $118,500 (2016, $127,200 for 2017) of wages – up to $7,347 per employee (“EE”)
- FUTA (federal unemployment): 0.60% (exclusive of FUTA credit reductions) on the first $7,000 of wages – up to $42 per EE
- SUI (state unemployment): 2.51% (2016, on average) on the first $17,780 (2016, on average) of wages – on average, $442 per EE
The combined cost of the above three employment taxes on employers can be significant. If an overpayment of any one of these taxes is inadvertently made, negative financial consequences can result. Taking steps to mitigate such overpayments, whether before they occur or after, is the role of those responsible for managing employment tax costs and the subject of our Webcast.
Common Causes of Overpaid Employment Taxes
SUI Rate Revisions
There are many instances that can lead to the issuance of a revised SUI tax rate: proactive statutory savings elections (e.g., voluntary contributions or joint account formation); the processing of a transfer of experience (i.e., tax rate) from one employer to another; amendments to taxable wages; benefit charge adjustments, and errors in a taxing jurisdiction’s calculation of an employer’s SUI tax rate. When rates are revised in favor of the employer, this can result in an overpayment of SUI taxes.
Mid-Year Wage Base Carryover
When employers on-board employees as a result of a mid-year acquisition of another employer’s trade or business, or portion thereof, they often treat the employees as “new hires” and restart the annual taxable wage base limits for FICA, FUTA, and SUI tax purposes. Many transactions, including the internal movement of employees from one legal entity to another, qualify for “successor” employer status and do not require wage base restarts. The successor requirements differ slightly between federal and state jurisdictions, and even further between state unemployment agencies, so the laws of each jurisdiction should be reviewed to determine if successor status is appropriate.
Multi-State SUI Sourcing
All unemployment agencies have adopted a uniform “four factor” test, to determine where each employee’s state unemployment wages should be reported (i.e., “sourced”). The test is applied in the following order of priority: Localization of Services; Base of Operations; Place of Direction and Control; and Residency. The objective of the SUI sourcing provisions is to cover under one state’s law all of the services performed by an employee for one employer, wherever the services may be performed. When an employer reports wages to every state in which an employee performs some services during a calendar year, not only does this complicate unemployment claims administration, it also increases the likelihood that the employer has overpaid SUI taxes.
Out-of-State SUI Wage Credits
If an employer follows the SUI sourcing rules described above, and it is determined that a mid-year permanent change in the SUI sourcing state is required, employers can count the wages paid in one state to determine the annual taxable wage base limit in the next state(s). Most jurisdictions (except Louisiana, Minnesota, and Montana) allow use of out-of-state wage credits. If the wage credits are not properly applied, an overpayment of SUI tax occurs.
Credits on Account
The common causes of overpaid employment taxes discussed during the Webcast can result in an employer having credits on their accounts, which often go unclaimed. It is prudent for employers to perform periodic credit checks by: calling the taxing jurisdiction, visiting the taxing jurisdiction’s website or account portal, or reviewing notices and other state-issued documents that may contain references to unused credits.
Mitigating the overpayment of employment taxes can reduce future tax costs or present an opportunity to recover those taxes already overpaid. Having a plan in place to identify and recover potential tax overpayments can produce meaningful financial benefits to an employer. For a replay of this webcast, please visit the following replay link: “Mitigating Overpayment of Employment Taxes“. For additional information on other employment tax matters that might impact your organization, please contact Pete Krieshok at (314) 214-7325 or via email at firstname.lastname@example.org. You can also visit our blog at Equifax Insights Blog.
Click here to download a PDF version of this webcast summary.
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