Question

Consider the following and provide thoughtful analysis and reflection: Your company has undergone extensive layoffs over the past fiscal year, and your CFO wants to know if the company has to collect or pay FICA and FUTA taxes for severance payments to laid-off workers. You remember reading some articles by D. P. Letsch in the Journal of Accountancy dealing with this subject. Find those articles and update the findings with new tax research to include updates to the tax code or regulations since the article was written and an update on the case law was made dealing with this subject. Prepare your research based on the material included in your textbook.

For discussion: Based on your credible research and analysis, what are the implications of your findings to companies with high employee turnover?

Answer 1

Ans. Employee turnover has a direct impact on company revenue and profitability. The revenue impact can be much higher depending on the industry, employee’s position and wage. If a good package is paid, this is an expense with no return on investment. Consider, also, management labor costs in placing classified ads, reviewing applications, interviewing and training. Although some companies utilize a job-placement service, this is still an expense. Additional expenses result from lost productivity or a lost customer base.

Lower productivity and sub-par quality of work can result from a disruption in daily operations due to an overall low number of employees or inexperienced employees without complete training. This is especially true in industries where repetition and comfort level play a larger role than innovation. Even if marketing expenses remain consistent in efforts to attract new customers, the return on investment is lowered if the company is losing return customers and customer referrals due to inexperienced staff or lower-quality products. This increases the cost of a one-time customer, lowering marketing return on investment.

The most prominent effect high turnover has on taxes has to do with unemployment taxes.This is especially true with small businesses that operate in cyclical industries, such as manufacturing and construction, that have frequent layoffs. Moreover, each time an employee leaves and you hire a new person, the wage cap that's applied to the taxes resets.

The relationship between high turnover and other taxes is not as concrete, but it does exist. High turnover may lower the amount of payroll taxes your small business pays if you are going through long periods of over-staffing due to high turnover or if you continuously hire new employees at lower pay rates.