21.7.3 Unemployment Taxes

Manual Transmittal

August 08, 2016

Purpose

(1) This transmits revised IRM 21.7.3, Business Tax Returns and Non-Master File Accounts, Unemployment Taxes.

Material Changes

(1) Various editorial and formatting changes have been made throughout this IRM.

(2) IRM 21.7.3.4.1 - Updated subsection FUTA Certification content for clarification.

(3) IRM 21.7.3.4.1.1 - Deleted subsection and merge content with IRM 21.7.3.4.1.

(4) IRM 21.7.3.4.2(3) - Updated subsection content for clarification.

(5) IRM 21.7.3.4.3.1 - Added paragraph (1) and updated paragraph (2) to clarify the state certification request requirement.

(6) IRM 21.7.3.4.3.1(2) - Added Form 940-B no response content.

(7) IRM 21.7.3.4.3.1(3) - Updated the table with state certification delivery scenarios.

(8) IRM 21.7.3.4.3.1(5) - Added new paragraph to provide no response guidance for multiple state certifications.

(9) IRM 21.7.3.4.5 - Added clarification to paragraph (3) for use of the primary wage item reference number. Delete paragraph (4) to eliminate confusion with the Federal Unemployment Tax Act (FUTA) Case Processing (FCP) System update requirements. The update was initiated by Servicewide Electronic Research Program (SERP) Feedback 201504319.

(10) IRM 21.7.3.4.6(1) - Deleted cites and substitute Rev. Proc. 2013-39 and IRB 2013-52 per Chief Counsel review.

(11) IRM 21.7.3.4.7(1)(a) - Updated sentence for tax item reference number clarification. The update was initiated by SERP Feedback 201504319.

(12) IRM 21.7.3.4.8(2) - Added Form 940-B no response content.

(13) IRM 21.7.3.4.8(2) - Updated the table to provide no response guidance for multiple states.

(14) IRM 21.7.3.4.8(4) - Updated the federal tax deposit penalty explanation and adjustment guidance. The update was initiated by SERP Feedback 201504350.

(15) IRM 21.7.3.4.8.1(2) - Deleted paragraph per Chief Counsel review and renumber subsection paragraphs.

(16) IRM 21.7.3.4.8.1.1- Deleted Indian Tribal Government Protective Claims subsection per Chief Counsel review.

(17) IRM 21.7.3.4.10 - Deleted example under paragraph (1) and update paragraph (2) with 2015 credit reduction state data.

(18) IRM 21.7.3.4.12 - Added new subsection to address the case of state certified wages exceeding the federal taxable wages.

Effect on Other Documents

IRM 21.7.3 dated August 31, 2015 (effective October 1, 2015) is superseded. The following IRM Procedural Updates (IPU) have been incorporated into this IRM: 15U1496 issued 10-09-2015, 15U1738 issued 12-03-2015, and 16U0390 issued 02-23-2016.

Audience

The primary users of this IRM are Wage and Investment employees. The IRM is intended for Customer Account Service issues involving unemployment returns.

Effective Date

(10-01-2016)


James P. Clifford
Director, Accounts Management
Wage and Investment Division

Unemployment Taxes Overview

  1. Unemployment insurance is a system which provides benefits for unemployed workers. This section contains instructions for adjusting Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, as well as requests for recertification.

  2. The Federal Unemployment Tax Act (FUTA) provides for cooperation between states and the federal government in the establishment and administration of unemployment insurance.

  3. Only the first $7,000 paid to each employee is subject to FUTA tax.

What Are Unemployment Taxes?

  1. Unemployment taxes, which are paid to federal and state governments by covered employers, subsidize state administered unemployment insurance programs and create a fund that is used to pay unemployment benefits to workers.

    1. From this fund, payments are made to employees who become unemployed.

    2. Tax is reported and filed on Form 940.

  2. Tax applies to payments such as:

    • Salaries

    • Wages

    • Commissions

    • Fees

    • Bonuses

    • Vacation allowances

    • Amounts paid to temporary or part-time employees

    • Value of goods, lodging, food, clothing, and other non-cash fringe benefits if not excludable pursuant to IRC 3306(b)(15)

Unemployment Taxes Research

  1. This section provides research procedures for unemployment taxes.

Form 940 Filing Requirements

  1. Form 940 is an annual return covering the period January 1 through December 31.

    1. It is due on or before January 31, following the close of the calendar year. (If the employer deposits all FUTA tax when due, the due date is extended until February 10, following the close of the calendar year.)

    2. The Master File Tax (MFT) is 10.

    3. The tax class is 8.

  2. Employers (other than agricultural or household employers) are liable to file if they meet either of the tests below:

    1. They paid wages of $1,500 or more in any calendar quarter for the current or preceding year.

    2. They had one or more employees (including full-time, part-time, and temporary) at any time in each of twenty calendar weeks during the current or preceding year.

  3. Agricultural employers are liable to file if they meet either of the tests below:

    1. They paid cash wages of $20,000 or more to agricultural workers in any calendar quarter in the current or preceding calendar year.

    2. They employed 10 or more agricultural workers for some portion of a day during any 20 different weeks in the current or preceding calendar year.

    Note:

    Aliens admitted to the U.S. on a temporary basis to perform farm work (also known as "H-2(A) visa workers" ) are counted to determine if one of the two (agricultural employer) tests set forth above are satisfied. Wages paid to H-2(A) visa workers are exempt from FUTA tax.

  4. Household employers are liable if they paid $1,000 or more in any calendar quarter during the current or preceding year for work in:

    • A private home

    • A local college club

    • A local chapter of a college fraternity or sorority

    Note:

    To report FUTA tax, household employers must file Schedule H (Form 1040) with their Form 1040 series return, unless they have other non-household employees, in which case the employer may include the household employees' FUTA tax on Form 940 instead. If household employees are included on Form 940, the employer must file the appropriate employment tax return (e.g., Form 941, Employer’s Quarterly Federal Tax Return, Form 943, Employer’s Annual Tax Return for Agricultural Employees, or Form 944, Employer’s Annual Federal Tax Return) to report the household employees' social security, Medicare, and withheld federal income taxes. If a trust is a household employer, the trust must file Schedule H (Form 1040) with Form 1041, unless it has other non-household employees, in which case the trust may include the household employees' FUTA taxes on Form 940 and report their social security, Medicare, and any withheld federal income taxes on Form 941, Form 943 and/or Form 944, respectively.

Deposit Requirements and Payments (Form 940)

  1. For deposit requirements see:

    • Publication 15, Circular E, Employer's Tax Guide,

    • Publication 51, Circular A, Agricultural Employer's Tax Guide,

    • Instructions for Form 940, or

    • IRM 20.1.4.9, Form 940.

  2. The FUTA threshold to carry a quarterly tax liability to the next quarter is $500.

  3. Balance due payments for Form 940, including balances that are up to ten years past due, can be made over the phone or by internet using a credit card. Payments can be made through several authorized third-party service providers who will obtain credit authorization during the transaction and provide a confirmation number as proof of payment. For specific information on business payments made by credit card, see IRM 21.2.1.48.5(7), Credit or Debit Card Payments (Pay by Phone or Internet).

    Reminder:

    A Federal Tax Deposit (FTD) cannot be paid by credit card. Taxpayers currently required to make a FTD must utilize one of the available Electronic Funds Transfer (EFT) deposit systems. See IRM 20.1.4.2, Authorized Deposit Methods, and IRM 21.2.1.47, Electronic Federal Tax Payment System (EFTPS), for more information.

Wages Subject to Federal Unemployment Tax Act (FUTA) Tax

  1. In arriving at the taxable wages subject to FUTA tax, the taxpayer subtracts the following amounts from the total payments made to all employees:

    • Amounts paid to each employee over $7,000

    • Amounts paid which are exempt from FUTA tax

  2. Information on exempt payments can be found in Form 940 Instructions, Publication 15, (Circular E), Employer's Tax Guide, and Publication 15-B, Employers Tax Guide to Fringe Benefits. Form 940 has check boxes to indicate exempt payments.

Contributions (FUTA)

  1. Contributions are payments which state laws require employers to make to an unemployment fund. These payments are sometimes referred to as "state unemployment taxes" and are contributions only to the extent they are not deducted from the employee's pay.

  2. An employer is permitted to use state unemployment tax contributions as an offset against the federal unemployment tax as a normal credit. Any timely contributions (made by the due date of Form 940) to the state (including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) unemployment fund increases this credit, which reduces the tax rate on Form 940.

Experience Rates (FUTA)

  1. Generally, employers are assigned experience rates by the state in which they do business.

    1. The rate is determined by the unemployment record of each employer and is the percentage at which contributions are made to the state unemployment fund.

    2. Employers who stabilize employment are rewarded in the form of reduced experience rates.

  2. The contributions paid according to the state employment insurance laws are permitted to be credited against the employer's federal unemployment tax. The credit is limited to 5.4 percent of the federal taxable wages.

Federal Tax Rate (FUTA)

  1. Employers pay FUTA on the first $7,000 of each employee's annual wages. The maximum FUTA tax rate is 6.0 percent (.060).

  2. An employer is allowed two kinds of credit against FUTA tax.

    • Normal credit, based on contributions

    • Additional credit, based on experience rate

Successor Employer- Computer Condition Code (CCC "5" )

  1. If the taxpayer checks box "b" on Form 940 or Form 940-PR, C&E (Code and Edit) codes the return with a CCC "5" indicating the taxpayer is a successor employer.

  2. This designation indicates the employer is entitled to certain credits based on payments made by the predecessor employer. Refer to Publication 15 (Circular E), Employer's Tax Guide, for more information.

Unemployment Taxes Procedures

  1. This section contains procedures for unemployment taxes.

    Reminder:

    This section attempts to address situations most frequently encountered when working unemployment tax issues. The guidance contained in this and other applicable IRMs cannot address every possible taxpayer inquiry. In some cases, it may be necessary to consult your lead or manager to determine the appropriate action. Any issue or question that cannot be resolved at the site level or that could have Servicewide impact should be elevated to the appropriate Headquarters analyst with program responsibility.

FUTA Certification Program

  1. The IRS uses the FUTA Certification program to determine whether Form 940 or Schedule H (Form 1040) reported state payments were actually paid into the appropriate state unemployment fund. There are 53 participating agencies, which includes the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Small Business Self Employed (SB/SE) Campus Compliance employees certify state payments (credits) using the procedures in IRM 4.19.5, Certification of State Federal Unemployment Tax Act (FUTA) Credits.

  2. The FUTA Case Processing (FCP) system is used by the SB/SE FUTA team to reconcile cases determined to have discrepancies. The state payment data is downloaded to the FCP system and the system identifies potential tax increases and deceases. The download to the FCP system is identified by the FUTA Release Year. The October 2016 download is identified as the FUTA Release 2014.

FUTA Certification Program - Discrepancy Cases

  1. Discrepancy cases result from the computerized and manual certifications of payments to State Unemployment Insurance Agencies.

  2. Form 940 adjustments processed under this program can be recognized by the following non-refile blocking series (BS):

    • 50-Non-zero certification (when the State certifies wages/contributions).

    • 51-Zero certification (when the State certifies no record of wages/contributions).

  3. The program issues the following letters:

    • Letter 4010C - Proposed Tax Increase

    • Letter 4011C - Proposed Tax Decrease

    • Letter 380C - State Certification Tax Adjustment Explained

  4. If the taxpayer received a FUTA discrepancy letter or notice and calls an Accounts Management phone application instead of contacting the FUTA contact provided in the letter or notice, follow procedures in IRM 4.19.5.4.13, Customer Service Representative (CSR) Information. This IRM cite provides FUTA case identification information and FUTA referral guidance.

  5. Route all correspondence and amended returns (both numbered and unnumbered) due to a FUTA assessment, or replies to a possible assessment to:

    Cincinnati FUTA Case Processing
    Stop 815G
    201 West River Center Blvd
    Covington, KY 41011

Manual Certification Required/Not Required (FUTA)

  1. Manual certification is required when the transaction code (TC) 150 is an IRC 6020 (b) assessment and

    1. the taxpayer is computing the tax at a rate less than the full applicable rate (See IRM 21.7.3.3.6, for the applicable rate.) or

    2. the taxpayer is filing a zero return and BMFOLU shows wages in the Processed (W2) column for that period.

    Note:

    See IRM 21.7.9.4.1.6, Duplicate Filing Conditions Involving Returns Prepared Under IRC Section 6020(b), for additional procedures on adjusting IRC 6020(b) accounts.

  2. If a manual certification is required, follow local procedures to prepare Form 940-B, Request for Verification of Credit Information Shown on Form 940, and forward to your FUTA liaison. However, if the taxpayer is an agent or contractor for the state, IRC 7602(c) requires the taxpayer be notified in advance when a third party contact is necessary to determine tax liability (this should occur very rarely). If this is the case, the steps below are mandatory:

    1. Call the taxpayer to advise of the recertification request being sent to the State.

    2. Document the case file with the name of the person contacted (person must have authority to prepare taxpayer's Form 940) and the time and date you spoke with that person.

      Note:

      If the taxpayer cannot be contacted by phone, Letter 3345C, Third Party Contact Letter (FUTA), must be sent to the taxpayer. The Form 940-B, Request for Verification of Credit Information Shown on Form 940, cannot be sent until 10 days after the Letter 3345C is initiated. (If the taxpayer is contacted by phone, the Form 940-B can be sent immediately after contact.)

    3. Prepare Form 12175, Third Party Contact Report Form, immediately after contacting the taxpayer by phone or by Letter 3345C.

    4. For more information on notification of third party contacts and preparation of Form 12175, see IRM 5.19.5.9, Notification of Third Party Contact.

  3. Manual certification is not required when the transaction code (TC) 150 is an IRC 6020 (b) assessment and

    1. The taxpayer is computing the tax at the full applicable rate.
      OR

    2. The taxpayer is filing a zero return and a TC 599 CC 008 (closed unagreed) is posted on the tax module and CC BMFOLU does not show wages in the Processed (W2) column for that period.
      OR

    3. The taxpayer is filing a zero return and a signed internal request is received from an area office (e.g., from a revenue officer) stating the taxpayer was out of business for the entire tax year(s) of the IRC 6020(b) assessment(s).

  4. If a manual certification is not required, input the adjustment using established procedures.

FUTA Liaison Responsibilities
  1. When taxpayers are contacted by the Automated 6020B Program, the notification provides response instructions. If the taxpayer doesn’t agree with the proposal, they have 45 days to prepare tax returns that show the taxpayer’s correct tax liability. If the taxpayer files a Form 940 claiming a reduced rate of assessment, they must attach a copy of the state certification showing the contributions paid to the state.

  2. If the certification is not attached, the IRS will attempt to secure a certification as a customer service courtesy. At this time, the IRS system security will not allow email delivery from a state agency. The certification must be faxed or mailed to the IRS. The preferred delivery method is fax. Designated employees act as liaisons between the IRS and State Labor Department Agencies or Workforce Commissions. These employees are responsible for submitting the completed Form 940-B for certification.

  3. Liaisons will use the following guidelines for initial and subsequent requests.

    If Then
    Initial request Allow 30 calendar days for response
    No response after 1st request Notate on Form 940-B 2nd request and resubmit. Allow 14 calendar days for response.
    No response after 2nd request Contact the agency representative by phone for certification. Contact information can be found on Servicewide Electronic Research Program (SERP), on the Who/Where tab listed as follows: State Labor Department Form 940 Certification Contacts. Inform the contact of your previous requests and allow 3 work days for the requested information.
    The state wants to email the certification Inform the state employee that the IRS can’t accept an email response and request the certification by fax. Suspend the case an additional 7 work days.
    The state wants to mail the certification via the U.S. Postal Service Inform the state we prefer a fax response; however, we will accept a certification by mail. Suspend the case an additional 7 work days.
    The state employee determines the IRS liaison is not authorized to receive the Form 940-C Advise the state employee to send the certification to the taxpayer with instructions to fax the certification to the IRS.
    60 days has elapsed since the initial request Notate the Form 940-B as a No Response.

    Note:

    Ensure the CIS History Notes indicate the IRS made 3 attempts to secure the recertification from the state(s).

  4. When the recertification is received from the State or a Form 940-B is notated No Response, forward it to the initial requestor for case resolution. See IRM 21.7.3.4.8, Claims and Requests for Adjustments (Form 940), for additional information.

  5. When the case involves multiple states and there are several no responses after the IRM 21.7.3.4.3.1(2) time frame, we are unable to adjust the taxpayer’s tax liability until all the state certifications are received for review. The liaison will take the following actions:

    • Update the Correspondence Imaging System (CIS) History Notes to identify the missing states.

    • Return the case to the initial requestor and advise the case is not workable due to No Response/Multiple States.

  6. If there is a trend of no response from a state, report the issue to Accounts Management Headquarters through the campus Planning and Analysis staff.

Additional Credit (FUTA)

  1. Employers who have been granted a state experience rate lower than 5.4 percent by a state for all or part of a year are entitled to an "additional credit." The additional credit is equal to the difference between:

    1. Maximum allowable federal credit (taxable federal wages times the federal credit rate); and

    2. State taxable wages multiplied by the employer's experience rate, if rate is less than maximum federal credit rate.

  2. Credit for contributions paid late (after the due date of the Form 940) is limited to 90 percent of the amount which would have been allowed as a credit for such contributions if such contributions were paid by Form 940 due date.

  3. A worksheet is provided in the Form 940 instructions. The worksheet is used to compute the credit if some of the wages paid by the employer were not subject to state unemployment tax or if the employer paid any state unemployment tax late.

Multiple State Cases (FUTA)

  1. Form 940 filers must complete and file Schedule A, Multi-State Employer and Credit Reduction Information, with their Form 940 if wages were paid to employees in more than one state, and/or wages were paid in any state subject to credit reduction. See IRM 21.7.3.4.10, Credit Reduction States, for additional information.

  2. Multiple state cases are computed the same as single state cases with one exception - additional credit must be computed individually for each state. See IRM 21.7.3.4.4, Additional Credit (FUTA), for computation procedures.

  3. When processing amended returns, adjust tax and wages using the primary state item reference codes. The primary wage item reference number is used for all wages not associated with a credit reduction state. See IRM 21.7.3.4.7, Item Reference Codes (Form 940), when determining the state codes. If unable to determine the primary state, adjust the state indicating the highest wages paid. If unable to determine the state with the highest wages paid, adjust the state listed on the address of record. When the credit reduction state has been adjusted and there are left over wages, follow procedures above to determine what state to adjust. If the primary state, the state indicating the highest wages paid, and the state listed as the address of record are all credit reduction states, then adjust wages of any state shown on the Schedule A that is not a credit reduction state.

    Exception:

    Credit reduction states wages must always be adjusted for the exact amount of the change. The State of Ohio is a credit reduction state for tax year 2015. Therefore, when processing an amended return involving the State of Ohio for tax year 2015, you must adjust the wages for the correct amount.

    Example:

    Taxpayer is amending total wages by $30,000. Only $10,000 were paid in the State of Ohio. The account indicates Illinois is the primary state. Your item reference codes for the wages will be: WOH for $10,000 and WIL for $20,000. The primary state of Illinois will be used for the tax change using item reference code TIL.

    Reminder:

    Recertification must be obtained from each state when it meets the criteria in IRM 21.7.3.4.3(1), Manual Certification Required/Not Required (FUTA).

Aggregate Returns

  1. Only agents of home care service recipients authorized under section 3504 may file an aggregate Form 940. See Rev. Proc. 2013-39 and IRB 2013-52 for additional information.

    Note:

    To request authorization to act as an agent for an employer, Form 2678, Employer/Payer Appointment of Agent, must be filed with the Service.

  2. Some aggregate returns may be distinguished by showing :

    • "State"

    • "City"

    • "County"

    in the entity area, or

    • "Notice 2003-70"

    • "Fiscal Agent"

    • "Fiscal intermediary"

    • "Employer Agent"

    • "Choreworkers"

    noted on the return. See IRM 3.11.154.3.17, Aggregate Returns and Choreworkers, for additional information.

  3. Beginning with the annual Form 940 for 2010, aggregate filers must complete Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, and submit with the Form 940. See the following subsection for additional information regarding the Form 940 (Schedule R).

Schedule R (Form 940): Allocation Schedule for Aggregate Form 940 Filers
  1. The IRS has developed Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, that allocates the aggregate wage, tax, credit, deposit and payment amounts reported on Form 940.

  2. Schedule R provides the IRS with client-specific information to support the totals reported by an agent on the aggregate return. It includes an allocation line for each client showing a breakdown of its wages and tax liability for the tax period. The instructions for each Schedule R explain all the information a section 3504 agent must provide with respect to each client reported on the aggregate form. When a Form 940 is processed and a Schedule R (Form 940) is attached, a Schedule R Indicator (SRI) will be posted to MF.

  3. If a taxpayer filed a Schedule R (Form 940) with his original return and he needs to correct the previously filed Form 940, then a revised Schedule R (Form 940) should be submitted with the amended Form 940. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    If a taxpayer is required to file a Schedule R (Form 940) and does not do so with his original return, he may submit another Form 940 with a Schedule R (Form 940) attached, which may create a Transcript (TRNS) 193. If so, follow existing procedures in IRM 21.7.9, BMF Duplicate Filing Conditions.

  4. The chart below indicates procedures for most Schedule R inquiries:

    If And Then
    Loose Schedule R is received The original return has posted (regardless if a Schedule R indicator is present) No additional action is needed.

    Note:

    If working a Correspondence Imaging System (CIS) case, add a case note to identify what was received and close the CIS case.

    Loose Schedule R is received The original return has not posted and the original processing time for Form 940 has not elapsed Suspend loose schedule pending posting of original return. See IRM 21.3.3.5.2, Loose Schedules, for more information.
    Loose Schedule R is received The original return has not posted and the original processing time for Form 940 has elapsed Contact taxpayer preferably by phone, to obtain a signed copy of the original return and suspend case for 40 days.
    1. If the taxpayer replies with a copy of the original return, process accordingly.

    2. If the taxpayer does not reply, reject the Schedule R back to the taxpayer requesting the original Form 940 (and accompanying Schedule R) be filed.

Item Reference Codes (Form 940)

  1. All increases and decreases in tax must have item reference codes showing the tax associated with the state where the adjustment is indicated.

    1. The tax item reference code amount must equal the TC 29X tax adjustment.

    2. The three digit item reference code for the tax portion of the adjustment is comprised of a "T" followed by the two digit state code.

  2. If adjustment is due to an increase or decrease in wages, an item reference code for wages is also required. The three digit item reference code for the wage portion is comprised of "W" followed by the two digit state code.

  3. If more than one state is involved, input the adjustment using the primary state. If unable to determine the primary state, adjust the state which indicates the highest wages paid. If unable to determine the state with highest wages paid, adjust the state listed on the address of record. Caution must be used however, if any of the states being amended was a credit reduction state for that particular tax year. In that case, each credit reduction state wage adjustment must be input. See IRM 21.7.3.4.5, Multiple State Cases, (FUTA), for an example.

  4. If no increase or decrease to tax or wages is made, item reference codes are not needed.

Claims and Requests for Adjustments (Form 940)

  1. Consider prior adjustments on the account.

  2. Process responses to manual certification requests as follows:

    If Then
    Certification request indicates no payments were made to the state Do not adjust to taxpayer's figures. Input TC 290 .00 to release the -A freeze and send Letter 380C, State Certification Tax Adjustment Explained: Form 940, to inform the taxpayer their contributions to the State could not be verified.
    Certification request indicates payments were made to the state Complete the worksheet in the Form 940 instructions to verify the correct tax and adjust accordingly. If the adjustment is different than what the taxpayer expected, correspond with Letter 380C explaining the changes.
    The campus FUTA Liaison notates the Form 940-B with No Response or the case file as not workable due to No Response / Multiple States Do not adjust to the taxpayer’s figures. Close the case by releasing the -A freeze, uploading the received Form 940-C documents to the CIS case file, and sending a Letter 380C informing the taxpayer:
    • The IRS contacted each state reported on the Form 940 and requested a state certification showing the contributions paid to the state.

    • Since we did not receive a response from the state(s) of [insert missing state(s)], we are unable to adjust the tax liability based on the tax return.

    • The taxpayer may request a state certification from the missing state(s).

    • If the missing state certifications are sent to the IRS by fax or mail, we will review them and make the appropriate changes to the tax liability.

    Note:

    Before closing the case as not workable, review the account history to determine whether the missing state certifications were received after the FUTA liaison indicated the case was not workable.

  3. Interest on a refund is not allowable when taxpayer reduces the tax as a result of an increase in state credits.

    1. Input a TC 291 with a secondary TC 770 .00 to restrict credit interest.

    2. Only input TC 770 .00 when there is a decrease to tax and no change to wages.

    Note:

    See IRC 6413(d) for additional information.

  4. Since master file is only able to compute a failure to deposit (FTD) penalty on the initial Record of Federal Tax Liability (ROFTL) supplied with the original return (Form 940, Part 5), we must determine whether a FTD penalty is applicable whenever an amended/supplemental return is filed or when a revised ROFTL schedule is submitted by the taxpayer. The new ROFTL requires a manual recalculation and update of the penalty. If deposits are made late, not made in sufficient amounts, made directly to the IRS (e.g., sending a check with a tax return or paying by credit card), or not made using EFT, a FTD penalty may be imposed on the module. IRM 20.1.4 , Failure to Deposit Penalty, provides Form 940 deposit requirements, penalty calculation guidance, and instructions for using transaction code 18X to assess or adjust a FTD penalty.

Claims Involving Indian Tribal Governments
  1. Under current law, Federally recognized Indian tribal governments (ITG) and their subdivisions, subsidiaries, and wholly-owned business enterprises are exempt from FUTA and can elect to participate in a state unemployment fund (SUTA), or in a reimbursement program. The SUTA exemption is an entity-by-entity election. If an election is made, the entity is exempt from FUTA only if it is a full participant in SUTA or in a reimbursement option with the state, and all SUTA liabilities are fully paid. See Announcement 2001-16, 2001-I C.B.715.

  2. In the rare instance a 2000 Form 940 involving Indian Tribal Government is received and the statute is open and an adjustment is required, see the archived copies of this IRM on SERP.

Railroad Retirement Board (RRB) Determinations
  1. If an amended Form 940 mentions RRB determinations, see IRM 21.7.2.6.5.8, RRB Employer Status Determinations.

Form 3465 Adjustments from Entity (FUTA)

  1. Entity verifies whether taxpayer is subject to FUTA tax and forwards Form 3465, Adjustment Request, to Accounts Management for processing. See IRM 21.7.11.4.2(6), CP172/192 - Form 3465, Request for Adjustment, for processing procedures.

Credit Reduction States

  1. Employers that pay their state unemployment tax timely and in full receive a 5.4 percent credit against their Federal tax. However, the credit is reduced when a state has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid these loans within the allowable time frame. A state that has not repaid money it has borrowed from the federal government is called a credit reduction state. The reduction is 0.3 percent for the first year and an additional 0.3 percent for each succeeding year until the loan is repaid.

    Exception:

    States passing their fifth consecutive January 1st with an outstanding balance may be subject to an additional credit reduction under FUTA 3302(c)(2)(C) (Benefit Cost Ratio (BCR) add-on). A waiver of this add-on is provided under 20 CFR 606.25 for states that meet the specified criterion.

  2. Information concerning whether a state is considered a credit reduction state or remains a credit reduction state is never known until November of each year. Any information concerning which states and the amount of credit reduction applicable is updated on SERP every year prior to the filing of Form 940. The following table has been updated to include the 2015 credit reduction percentages, which includes any applicable BCR.

    State/Jurisdiction Abrv 2012 2013 2014 2015
    Arkansas AR .006 .009
    Arizona AZ .003
    California CA .006 .009 .012 .015
    Connecticut CT .006 .009 .017 .021
    Delaware DE .003 .006
    Florida FL .006
    Georgia GA .006 .009
    Illinois IL
    Indiana IN .009 .012 .015 0.0
    Kentucky KY .006 .009 .012 0.0
    Michigan MI
    Minnesota MN
    Missouri MO .006 .009
    Nevada NV .006
    New Jersey NJ .006
    New York NY .006 .009 .012 0.0
    North Carolina NC .006 .009 .012 0.0
    Ohio OH .006 .009 .012 .015
    Pennsylvania PA
    Rhode Island RI .006 .009
    South Carolina SC
    Vermont VT .003
    Virginia VA
    Virgin Islands VI .015 .012 .012 .015
    Wisconsin WI .006 .009

    Note:

    In 2015, the states of Indiana, Kentucky, New York, and North Carolina repaid their outstanding advances, received a waiver, or met the FUTA Cap. See archived copies of IRM 21.7.3 for credit reduction states prior to 2012.

  3. Any employer reporting wages paid in a credit reduction state/jurisdiction must use Schedule A, Form 940 to compute the tax.

    Note:

    If there are no credits for state unemployment tax, the credit reduction is not applicable and tax is computed at the maximum FUTA rate.

  4. If an adjustment is the result of a change to the total taxable wages (not credit for payments made to the State), the amount shown on the return for credit reduction must also be adjusted, using the appropriate credit reduction factor for the applicable State and year.

    1. The reduced credit increases the federal tax liability.

    2. The credit reduction portion of tax is not required to be deposited until the due date of the Form 940. See IRM 20.1.4.9, Form 940, for more information. If questioned by the taxpayer, instruct them to report the additional credit reduction amount with the fourth quarter's liability.

State Certified Wages Less Than Federal Taxable Wages

  1. When state certified wages are less than federal taxable wages reported on Form 940 and the net tax discrepancy is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. Calculate the gross federal tax on the federal wages.

    2. Calculate the allowable state credit on the state wages.

State Certified Wages Exceed the Federal Taxable Wages

  1. When the state taxable wages are $4000 or more than the federal taxable wages and the state wage base is the same as the federal wage base (IRM 3.12.154-15, Taxable State Wage Bases):

    1. Increase the federal taxable wages to match the state taxable wages.

    2. Calculate the net tax liability (Line 10 Worksheet) with the adjusted wage amounts.

    3. If the net tax discrepancy is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , accept the taxpayer’s figures.

    4. If the net tax discrepancy is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , adjust the tax and send the taxpayer an explanation with Letter 380C.

IRC 127 Claims (FUTA)

  1. A minimal number of claims may be received as a result of the permanent extension of IRC 127. Claims can be allowed without requesting recertification. See IRM 21.7.2.5.9, IRC 127, Educational Exclusions, for more information.

Schedule H FUTA Erroneously Reported

  1. Some taxpayers erroneously report FUTA tax on both Schedule H, Form 1040, Form 1041, and on Form 940. Others report the tax on Form 940 instead of Schedule H.

  2. Use the table below to adjust these accounts.

    If Then
    Tax was reported on both Schedule H (MFT 30/05) and Form 940 (MFT 10) 1. Delete portion of FUTA tax from MFT 10.
    2. Transfer any payments intended for Schedule H FUTA tax from MFT 10 to MFT 30/05. (See Note below table.)
    3. Inform taxpayer of corrections made.
    4. Delete filing requirements if appropriate.
    Tax was reported on Form 940 only 1. Leave the assessment on MFT 10.
    2. If payments on MFT 30 were intended for FUTA assessment, transfer to MFT 10. (See Note below table.)
    3. Abate applicable penalties and interest if necessary payment(s) was received by ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the following year.
    4. If payment(s) was not received by ≡ ≡ ≡ ≡ ≡ manually adjust penalties and interest based on the correct due date of April 15.
    Tax was reported on Schedule H (MFT 30/05) only 1. Leave assessment on MFT 30/05.
    2. If payments on MFT 10 are intended for Schedule H, transfer to MFT 30/05. (See Note below table.)
    3. Delete filing requirements on MFT 10, if appropriate.
    Tax was erroneously reported on both Form 940 and Form 941 or Form 944 See IRM 21.6.4.4.8.12, BMF Form 941, Employer's Quarterly Federal Tax Return, Filed Instead of IMF Schedule H, Household Employment Taxes.

    Note:

    If unable to ascertain which payments on MFT 10 or 30/05 were intended for account where assessment is being made, contact taxpayer (preferably by telephone) to determine which payments need to be transferred.

FUTA Electronic Filing

  1. Information regarding Form 940 electronic filing options are provided in Pub 4163, Modernized e-File (MeF) Information for Authorized IRS e-File Provides for Business Returns, and IRM 3.42.4, IRS e-file for Business Tax Returns.

  2. All e-filed Forms 940 can be recognized on TXMOD by their unique Filing Location Codes (FLC)/Document Codes (Doc Codes). See IRM 3.42.4.4.2.1(11), Researching e-file BMF Identification Codes, for more detail.

  3. IRM 3.42.4.14, Handling e-file Inquiries contains a list of contacts and telephone numbers which can be provided to callers who need assistance with electronic filing issues.