Question

Compare Social Security and the Railroad Retirement Tax Act by clicking the web links below.

    Social Security Administration

    Railroad Retirement Tax Act      

In your initial post, address the following:

Explain why employers need to pay unemployment taxes.

Identify how many unemployment taxes employers are required to pay and explain how they need to calculate it.

Discuss if employees need to pay unemployment taxes.

Answer 1

Comparison Social Security and the Railroad Retirement Tax Act

When someone first applies for Social Security Disability Insurance (SSDI) a question on the application will ask if the applicant has ever worked for the railroad. Considering most of the questions on the application, this may seem like a strange one, but it is an important question.

The Railroad Retirement Act provides benefits to retired and disabled workers of the railroad, and their dependents, based on their length of employment in the railroad industry. The benefits paid are similar in structure to how SSDI works, but there are considerable differences, including payment amounts, eligibility age and taxation amounts.

One main difference is the monthly benefit amount paid. According to 2010 fiscal year numbers, the average monthly payment by the Railroad Retirement Board (RRB) was $2,185 per month compared to $1,170 per month for Social Security. Spouse’s benefits averaged $815 per month for railroad workers and $560 under Social Security.

Another major difference from Social Security is the age in which railroad workers are eligible for benefits. Railroad workers are eligible for FULL benefits at age 60 with 30 or more years of service. Social Security recipients are able to start receiving benefits at age 62, but pay a penalty by receiving payments prior to their full retirement age no matter how many years they worked. Social Security recipients who decide to collect early payments receive about 80 percent of what their full retirement amount would be and will never reach that full retirement amount no matter what age they become.

In addition to receiving railroad retirement benefits, railroad workers are also eligible for Social Security benefits for their children if the railroad worker is disabled or retired. The Railroad Retirement Act only provides payments to children of deceased railroad workers.

It may sound like the railroad benefit system is better than Social Security because payments tend to be more and the age of full eligibility is less than that for Social Security recipients, but railroad workers are paying more in taxes for their benefits.

Social Security recipients pay the Tier I payroll tax rate of 5.65 percent. Railroad workers pay the same rate, but also have to pay the Tier II payroll tax rate of 3.9 percent for earnings up to $79,200 for a combined payroll tax rate of 9.55 percent.

What are Unemployment Taxes? unemployment taxes are paid by employers to the federal government and states in order to fund unemployment compensation benefits for out-of-work employees. Employers are taxed based on their type of business; the higher the unemployment rate in that type of business, the higher the tax. For example, a fast food restaurant with high turnover would be taxed at a higher rate than a medical office with low turnover.

To fund unemployment compensation benefit programs, employers are subject to federal and state unemployment taxes based on various factors. These factors include the amounts employers pay their employees, the type and age of the business, and the unemployment claims filed against the business.

Employers must pay federal and state unemployment taxes in order to fund the unemployment tax system. Unemployment compensation is designed to pay benefits to workers when they lose their jobs through no fault of their own.

The Federal Unemployment Tax Act (FUTA) is a federal provision that regulates the allocation of the costs of administering the unemployment insurance and job service programs in every state. As directed by the Act, employers are required to pay federal and/or state unemployment taxes which are used to fund the unemployment account of the government. The funds in the account are used for unemployment compensation payment to workers who have lost their jobs. Although FUTA payroll tax is based on employees' wages, it is imposed on employers only, not their employees. In other words, it is not deducted from employee wages. This way, FUTA tax differs from Social Security tax which is applied to both employer and employee.

A business owes federal unemployment taxes if it paid at least $1,000 in wages during any calendar quarter in the current or previous year. (A calendar quarter is January through March, April through June, July through September, or October through December). The amount of an employer's FUTA tax liability determines when the tax must be paid, and IRS Form 940 which is used for reporting the tax is due in the first quarter of the year. As of 2018, the FUTA tax rate was 6% of the first $7,000 paid to each employee annually. This means that if a company had 10 employees, each of whom earned wages of at least $7,000 for the year, the company's annual FUTA tax would be 0.06 x ($7,000 x 10) = $4,200. Once an employee’s year-to-date (YTD) wages exceed $7,000, an employer stops paying FUTA for that employee. Therefore, the maximum amount an employer pays in this tax is $420 per employee.

Many states collect an additional unemployment tax from employers. Employers can take a tax credit of up to 5.4% of taxable income if they pay state unemployment taxes. This amount is deducted from the amount of employee federal unemployment taxes owed. An employer that qualifies for the highest credit will have a net tax rate of 0.6% (calculated as 6% minus 5.4%). Thus, the minimum amount an employer can pay in FUTA tax is $42 per employee. However, companies that are exempt from the federal unemployment tax do not qualify for the FUTA credit.

Wages an employer pays to his or her spouse, child under the age of 21, or parent do not count as FUTA wages. Furthermore, payments such as fringe benefits, group term life insurance benefits, and employer contributions to employee retirement accounts are not included in the tax calculation for federal unemployment tax.

In general, all employers have to pay unemployment taxes. Some exemptions exist, which are discussed later. Employers need to know about federal and state unemployment taxes.

Federal unemployment tax is mandated by the Federal Unemployment Tax Act (FUTA). FUTA taxpays for the federal government’s oversight of each state’s unemployment insurance program.

You must also pay for state unemployment insurance (SUI). State unemployment insurance pays out benefits to unemployed workers in your state. You also pay a tax for this, called SUTA tax or SUI tax.

Federal and state unemployment taxes have different tax rates.

How much is FUTA tax?

FUTA tax is only paid by the employer. Do not withhold the tax from employee wages.

The 2017 FUTA tax rate is 6% (0.06). Most employers receive the maximum FUTA tax credit of 5.4% (0.054) which reduces the tax rate to 0.6% (0.006).

FUTA tax is only paid on the first $7,000 each employee earns per year. This $7,000 mark is called the wage base. You do not owe any FUTA tax on employee earnings beyond $7,000 in a year.

If you have the maximum FUTA tax credit, your maximum tax payment per employee is $42 ($7,000 x 0.6%).

Some employers live in credit reduction states. This means your state borrowed money from the federal government to cover unemployment benefits, and the state hasn’t paid back the loan after two years. The credit reduction reduces the FUTA tax credit for all employers in the applicable states.

For example, if your state receives a credit reduction of 0.3%, your credit will become 5.1% (5.4% – 0.3%). This results in a FUTA tax rate of 0.9%. Because the tax credit is reduced, you must pay increased FUTA taxes.

How much is SUTA tax?

SUTA tax, like FUTA tax, is only paid by the employer. You should not withhold anything from employee wages for state unemployment insurance.

When you hire your first employee, you must register for an account with your state unemployment agency.

New employers start with an introductory unemployment tax rate. The new employer rates last for a set period, determined by your state.

After your introductory rate, your state will update your tax rate on an annual basis. Your SUTA tax rate depends on your state. Each state uses different methods to determine rates. The state will likely consider your industry and the number of unemployment claims your former employees filed.

Each state also has a wage base. This is the maximum amount of wages per employee that the SUTA tax is based on. For example, if the wage base is $10,000 for your state, only calculate the unemployment tax on the first $10,000 each employee earns per year.

If you have employees in multiple states, you must pay the unemployment taxes for each employees’ respective state. For example, if you have an employee who works in Maryland, you must register and pay unemployment taxes with Maryland. If you also have an employee who works in Virginia, you must also register and pay unemployment taxes with Virginia.