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Part 21. Customer Account Services

Chapter 7. Business Tax Returns and Non-Master File Accounts

Section 3. Unemployment Taxes

21.7.3  Unemployment Taxes

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21.7.3.1  (01-01-2007)
Unemployment Taxes Overview

  1. Beginning with the 2006 calendar year return, a redesigned Form 940, Employer's Annual Federal Unemployment Tax Return, was developed. The new Form 940, "One form for everyone — plain and simple," combines the previous versions of Form 940 and Form 940-EZ into one simplified form. The new form maintains all the advantages of the Form 940-EZ and eliminates taxpayer decision-making about which form to file. Form 940-PR was also redesigned for 2006. The new form provides significant burden reduction to multi-state employers.

  2. Unemployment insurance is a system which provides benefits for unemployed workers. This section contains instructions for adjusting Forms 940 and 940-EZ, as well as requests for recertification.

  3. The Federal Unemployment Tax Act (FUTA) provides for cooperation between states and the federal government in the establishment and administration of unemployment insurance. Under this system, the employer is subject to payroll taxes levied by the federal government and the state government.

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

21.7.3.2  (01-01-2005)
What Are Unemployment Taxes?

  1. Unemployment taxes, which federal and state governments levy against 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

21.7.3.3  (01-01-2005)
Unemployment Taxes Research

  1. This section provides research procedures for unemployment taxes.

21.7.3.3.1  (10-01-2007)
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 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 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, 943 or 944) 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 Forms 941, 943 and/or 944, respectively.

  5. A federally recognized Indian Tribal government employer (including any subdivision, subsidiary, or wholly-owned business enterprise) is exempt from FUTA for services rendered after December 20, 2000 if certain conditions are met. A transition rule for 2000 eliminated an Indian tribal government's liability for FUTA taxes for services performed before December 21, 2000, if specific requirements were satisfied. The 2000 transition rule also allowed for FUTA tax refunds for the 2000 tax year under certain conditions. See IRM 21.7.3.4.8.1 for more information.

21.7.3.3.2  (03-30-2006)
Deposit Requirements (Form 940)

  1. Deposit requirements can be found in Publication 15 (Circular E), Publication 51 (Circular A), Form 940 instructions, or IRM 20.1.4.7, Form 940 Series.

  2. For calendar years 2004 and prior, the FUTA threshold to carry a quarterly tax liability to the next quarter was $100. For calendar year 2005 and subsequent, this amount was increased to $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. These payments can be made through either of two authorized third-party service providers who will obtain credit authorization during the transaction and provide a confirmation number as proof of payment. Taxpayers currently required to make FTD's, must still make deposits. FTD's cannot be paid by credit card. For specific information on business payments made by credit card, see IRM 21.2.1.50.4, Credit Card Payments (Pay by Phone or Internet).

21.7.3.3.3  (01-01-2006)
Wages Subject to 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 and in Publications 15 and 15–B. The revised 2006 Form 940 has checkboxes to indicate exempt payments.

21.7.3.3.4  (03-31-2005)
Contributions (FUTA)

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

  2. Any timely made contributions (by the due date of Form 940 or Form 940-EZ) to the state (including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) unemployment fund increases the employer's credit which reduces the tax rate on Forms 940/940-EZ.

    Note:

    Taxpayers residing in Arizona, for calendar years 2005 and subsequent, are not required to pay the State of Arizona quarterly unemployment tax if the combined amount of the unemployment and job training employer taxes due is less than $10.00. The few employers that may not owe tax at all to Arizona, but otherwise qualify for filing Form 940-EZ, may continue to file Form 940-EZ (for years prior to 2006). They are not charged a higher tax rate since they do not pay any state unemployment tax. Arizona employers filing Form 940, who also do not pay Arizona contributions (tax is below $10.00 quarterly), should indicate in Part II, column (i), the amount of tax not owed to the State of Arizona. This prevents the taxpayer from having to pay a higher tax rate than applicable.

21.7.3.3.5  (01-01-2007)
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.

    Note:

    Beginning with the 2006 year, the state reporting number is no longer captured during original processing.

  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% of the federal taxable wages.

21.7.3.3.6  (01-01-2005)
Federal Tax Rate (FUTA)

  1. The federal tax rate is 6.2% of the first $7,000 of wages for each employee.

21.7.3.3.7  (01-01-2007)
Successor Employer — CCC "5"

  1. Beginning with the 2006 year, if the taxpayer checks box " b" on Form 940 or Form 940-PR , C&E 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.

21.7.3.4  (01-01-2005)
Unemployment Taxes Procedures

  1. This section contains procedures for unemployment taxes.

21.7.3.4.1  (01-01-2005)
Certification (FUTA)

  1. Certification of state credits is made per IRM 4.19.5, Certification of State FUTA Credits. It also contains information on the proper method to compute allowable state credit.

21.7.3.4.2  (10-01-2008)
Manual Certification Required (FUTA)

  1. Manual certification is required only for accounts where the TC 150 is an IRC 6020(b) assessment (except when the taxpayer computes the tax at the full rate of .062).

    Note:

    If 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), do not request manual certification. Abate tax and use request as source document.

    Note:

    See IRM 21.7.9.4.9.4 for additional procedures on adjusting IRC 6020(b) accounts.

  2. Prepare Form 940-B, Request for Verification of Credit Information Shown on Form 940, to obtain manual certification. Generally, local procedures can be followed when it is determined manual certification is necessary. 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 must be sent to the taxpayer. The Form 940-B 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 5.19.5.8, Notification of Third Party Contact.

21.7.3.4.3  (10-01-2008)
FUTA Case Processing and Other Certification Verifications

  1. FUTA Case Processing (FCP) System replaced the FUTA Pyramid System. Currently three years of state records are maintained on the FCP database under the Automated FUTA System.

    1. File contains information for the three years prior to the current processing year (currently 2004, 2005 and 2006). As of June 2009, the FCP system will contain information for 2005, 2006 and 2007.

    2. File is updated each May to drop the earlier year and add the subsequent year.

    3. Use local procedures to check the FCP before requesting manual certification for those years contained on the FCP.

  2. For cases which cannot be resolved using the FCP:

    If Then
    Taxpayer submits copies of canceled checks, state reports, etc. to substantiate payments to the state Forward copies, along with Form 940-B, to assist the state in certifying taxpayer's wages/contributions. ( See IRM 21.7.3.4.2(2) for mandatory procedures involving third party contacts.)
    A reply to a Form 940–B is not received Accept taxpayer's proof of payment and make appropriate adjustment.

21.7.3.4.4  (01-01-2005)
Additional Credit (FUTA)

  1. Employers who have been granted a state experience rate lower than 5.4% 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% 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. Use the following formula for computing allowable credit when all, or a portion of, the payments to the state are paid late:

    1. Compute 5.4% of the federal taxable wages paid.

    2. Add all timely payments and any additional credit and subtract from the amount obtained in Step 1.

    3. Multiply amount obtained in Step 2, or late payments, whichever is smaller, by 90%.

    4. Add all timely payments, additional credit, and the 90% figure obtained in Step 3 to arrive at the allowable credit.

    Note:

    See IRM 4.19.5, Certification of State FUTA Credits.

21.7.3.4.5  (10-01-2007)
Multiple State Cases (FUTA)

  1. Beginning with the 2006 year, employers who paid wages to employees in more than one state, and employers who paid wages in any state subject to credit reduction, must complete and file Schedule A (Form 940), Multi-State Employer and Credit Reduction Information, with their Form 940.

  2. Multiple state cases are computed the same as single state cases with one exception — additional credit must be computed individually for each state.

  3. The tax adjustment for each state should equal the difference between the original and amended return total for the "computation of tentative credit," columns (h) and (i) for each individual state (2005 & prior Form 940).

    Note:

    When recertification results in a tax adjustment different from that indicated on the amended return, use the corresponding figures to arrive at the column (h) and (i) totals.

  4. It is no longer necessary to make changes to each state when an amended return is received involving more than one state. Recertification must be received from each state only when it meets the criteria in IRM 21.7.3.4.2 (1). Adjustments to tax and wages must be made 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 the highest wages paid, adjust the state listed on the address of record.

    Exception:

    The State of New York was a credit reduction state for the years 2004 and 2005. If the taxpayer is amending wages for the State of New York for either year, adjust for the correct amount.

    Example:

    Taxpayer is amending his total wages by $30,000. Only $10,000 in wages was for the State of New York. The account indicates California is the primary state. Input your adjustment with WNY for $10,000 and WCA for the remaining $20,000 in wages. New York's wages must always be adjusted for the exact amount of change. In this example, input the tax change under TCA.

  5. Form 940 Instructions for 2006 and subsequent contains a worksheet that is used to calculate any adjustments to the maximum credit.

  6. See IRM 4.19.5.4.7, Processing Reply, No Reply and/or Undeliverable Cases, involving late replies to FUTA assessments.

21.7.3.4.6  (10-01-2007)
Limited Exception for Aggregate Returns

  1. Aggregate FUTA returns are not accepted unless the agent represents a household employer that is a disabled individual or other welfare recipient receiving home-care services through a state or local program. See Rev. Proc. 80–4, 1980–1 C.B. 5817 and Notice 2003–70, 2003–43 I.R.B. 916.

  2. These forms are distinguished by the return showing " State," "City," "County," in the entity area, or "Notice 2003–70, " "Fiscal Agent," "Fiscal Intermediary," "Home-Care Service Provider," "Household Employer Agent," or "Choreworkers" noted on the return. These returns are processed as submitted. The persons performing the services are often referred to as "choreworkers." See IRM 3.11.154.3.12 for additional information.

    Note:

    This is a special procedure for aggregate choreworker FUTA returns only, and is an exception to our standard procedures.

21.7.3.4.7  (01-01-2006)
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 total of the item reference code amounts for tax must equal the TC 290 or TC 291 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 for an example.

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

21.7.3.4.8  (10-01-2008)
Claims and Requests for Adjustments (Form 940)

  1. Consider prior adjustments on the account.

  2. Request manual certification from appropriate state(s), if applicable. ( See IRM 21.7.3.4.2(2) for mandatory procedures involving third party contacts.) If a reply to a certification request is not received and the amount of state credit cannot be determined:

    1. Compute tax change based on federal tax rate (gross FUTA tax).

    2. Advise taxpayer accordingly. ( Letter 380C must be used unless contact is made by phone.)

  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. If module being adjusted contains TC 18X, refer to IRM 20.1.4, Failure to Deposit Penalty.

21.7.3.4.8.1  (10-01-2008)
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.71.

  2. The law provides a transition rule that may eliminate an Indian tribal government's obligation to pay FUTA taxes for certain services performed during 2000, but before December 21 of that year. Under the rule, there was no FUTA tax liability for services performed by its employees if certain conditions were met.

  3. 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.

21.7.3.4.8.1.1  (01-01-2005)
Indian Tribal Governments Protective Claims

  1. Indian tribal governments may file protective claims involving exemption for FUTA for years prior to 2000.

  2. Currently, there is no provision to allow claims for years prior to 2000. If a protective claim is received, it must be routed as CATA. The same procedures apply to these protective claims as for other protective claims, as described in IRM 21.5.3.4.7.3, Protective Claims.

21.7.3.4.8.2  (01-01-2005)
Railroad Retirement Board (RRB) Determinations

  1. If an amended Form 940 mentions RRB determinations, see IRM 21.7.2.4.24.5.8, RRB Employer Status Determinations.

21.7.3.4.9  (10-01-2007)
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:

    1. 50-Non-zero certification

    2. 51-Zero certification

  3. When adjusting an account containing a previous adjustment in these blocking series, and the resolution of the current adjustment case is based on State certification:

    1. Use BS 50 when the State certifies wages/contributions.

    2. Use BS 51 when the State certifies no record of wages/contributions.

  4. Process replies only if the case is received as a duplicate filed return and currently is assigned a DLN. Route all mail and otherwise amended returns received due to FUTA assessments, or replies to possible assessment, to the applicable FUTA Unit. Follow procedures described below if the return has been assigned a DLN and worked in Accounts Management:

    If Then
    Taxpayer disagrees or does not understand the additional assessment 1. Send taxpayer Letter 380C. (This explains adjustment made and requests taxpayer to obtain recertification from the State.)
    2. Input STAUP for eight cycles.
    3. Do not adjust account at this time.
    Taxpayer sends recertification 1. Recompute tax based on recertification figures.
    2. Input adjustment in appropriate BS (00 or 15).

21.7.3.4.10  (01-01-2007)
Unexplained or Questionable Exempt Amounts (FUTA) — CP 174/874

  1. Beginning January 1, 2007, CPs 174/874 are no longer generated. C&E no longer enters CCC "C" on Form 940 that has an unexplained or questionable amount. The revised Form 940, Part II, line 4 has new checkboxes to explain exempt payments.

    Note:

    These instructions are being left in the IRM to accommodate any replies to CP 174's that may have generated for Forms 940 processed in 2006.

  2. The "C" causes the issuance of CP 174/874 which requests an explanation from the taxpayer of the amount claimed. CP 174/874 is a four-part notice. The first two copies are sent to the taxpayer, the third copy is attached to the Form 940 retained in a Suspense File, and the fourth copy is used as a charge-out in Return Files.

    1. Suspense Files matches the CP 174 reply with the CP 174/Form 940 maintained in the Suspense File.

    2. Follow instructions in (3) below to resolve CP 174/874.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. Replies to CP 174 — action required.

    If Then
    Taxpayer sends valid explanation 1. Input TC 290 .00 in BS 00/15.
    2. Send Letter 603C advising taxpayer the explanation was accepted.
    Taxpayer sends unacceptable explanation 1. Increase wages by appropriate amount.
    2. Increase tax by 6.2% of the line 2 amount.
    3. If an FTD penalty is present, increase penalty by 10% of additional tax assessed. If no FTD penalty present, do not assess.
    4. Send Letter 603C to taxpayer to advise the explanation is unacceptable and refer them to Publication 15 or Publication 15-B.
    Taxpayer's reply indicates corporate officers exempt from FUTA 1. Follow Steps 1–3 above (when taxpayer sends unacceptable explanation).
    2. Send Letter 603C and explain wages are subject to FUTA, even though they may be exempt from State unemployment tax.
    Taxpayer's reply indicates adjustment was claimed in error Follow Steps 1–3 above (when taxpayer sends unacceptable explanation). Allow the adjustment notice to be your response. (Letter 603C can be sent in addition to the adjustment notice, if desired.)
    No reply is received 1. Follow Steps 1–3 (when taxpayer sends unacceptable explanation).
    2. Send Letter 603C and advise taxpayer the tax associated with the exempt payments claimed on Part I, line 2 is being increased, since no reply to our request for an explanation was received .
    No reply is received and it can be determined the amount on Part I, line 2 was a mistake and belonged on line 3 Input TC 290 .00.
    Reply or no reply received, but TC 150 indicates CP 174 was issued in error Input TC 290 .00 and send apology letter to TP (telephone apology can be made if notated on case file).

21.7.3.4.11  (01-01-2005)
Exempt Organizations (FUTA)

  1. The information previously in this subsection has been moved to IRM 21.7.7, Exempt Organizations and Tax Exempt Bonds.

21.7.3.4.12  (01-01-2005)
Form 3465 Adjustments from Entity (FUTA)

  1. Cases are initiated when taxpayer is no longer liable for FUTA tax.

  2. Process as below:

    1. Input TC 291 for total amount of tax.

    2. Delete Form 940 filing requirements (if not already done).

    3. Send Letter 858C to inform taxpayer they are no longer liable for FUTA tax.

21.7.3.4.13  (01-12-2006)
Credit Reduction States

  1. If a State has received a loan (advance) from the Federal Unemployment Account in order to be able to pay unemployment benefits, but fails to make a repayment on time, there can be an increase in the net federal tax paid by employers in that state. The total credit allowable against the federal tax (subject to that state’s law) is reduced by the applicable percentage for each year in which a balance of unreturned advances exists. Credit reduction percentages are as follows:

    • 2004 credit reduction percentage is .003 (.3%)

    • 2005 credit reduction percentage is .006 (.6%)

    Note:

    New York was a credit reduction state for 2004 and 2005. Any employer reporting wages paid for New York is required to file the Form 940. If an employer submits an amended Form 940-EZ for tax year 2004 or 2005 and it indicates contributions are paid to the state of New York, the tax change will be different than what the taxpayer has requested.

    Example:

    For 2004, taxpayer is increasing their New York employees' wages by $30,000. The taxpayer's amended Form 940-EZ shows an increase to tax of $240. The increase to tax should be $330. Increase the tax and contact the taxpayer in writing or by phone to explain the difference.

    Example:

    For 2005, taxpayer is increasing their New York employee's wages by $30,000. The taxpayers amended Form 940-EZ shows an increase to tax of $240. The increase to tax should be $420. Increase the tax and contact the taxpayer in writing or by phone to explain the difference.

  2. If adjustment is the result of a change to the total taxable wages (not credit for payments made to the State), the amount shown on return for credit reduction must also be adjusted.

    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 20.1.4.7, Form 940 Series. If questioned by the taxpayer, instruct them to report the additional credit reduction amount with the fourth quarter's liability.

  3. 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 will be updated on SERP every year prior to the filing of Form 940.

  4. Use the credit reduction states, years involved, and the appropriate credit reduction factor to calculate the credit amount due when there is a wage adjustment for a credit reduction state.

  5. There were no credit reduction states for 2006, 2007 or 2008.

21.7.3.4.14  (01-01-2005)
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.

21.7.3.4.15  (01-01-2005)
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 21.7.2.4.18.6.6 , IRC 127, Educational Exclusions, for more information on IRC 127.

21.7.3.4.16  (01-24-2006)
Schedule H FUTA Erroneously Reported

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

    Note:

    Do not work these cases by phone.

  2. Prepare Form 4442/e-4442 with the necessary information.

  3. Use the table below to adjust these accounts.

    If Then
    Tax was reported on both Schedule H (MFT 30) and Form 940/940-EZ (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. (See Note below table.)
    3. Inform taxpayer of corrections made.
    Tax was reported on Form 940/940-EZ 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) only 1. Leave assessment on MFT 30.
    2. If payments on MFT 10 are intended for Schedule H, transfer to MFT 30. (See Note below table.)
    Tax was erroneously reported on both Forms 940 and 941/944 See IRM 21.6.4.4.8.11, 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 were intended for account where assessment is being made, contact taxpayer (preferably by phone) to determine which payments need to be transferred.

21.7.3.4.17  (01-01-2007)
Form 940-EZ

  1. Form 940-EZ was obsoleted beginning with the 2006 year.

  2. Form 940-EZ was a streamlined unemployment tax return which was used (for 2005 & prior years) by a taxpayer if all of the following conditions were met:

    1. State unemployment taxes (contributions) were paid to only one state.

    2. Payments to the state were made by the due date of Form 940-EZ and the state was not a credit reduction state.

    3. All wages subject to FUTA tax were also subject to state unemployment tax.

  3. A taxpayer could not use Form 940-EZ in either of the following situations:

    1. Successor employer claimed credit for contributions by a former employer.

    2. FUTA tax was owed only for household work in a private home.

  4. Compute tax by multiplying the total taxable wages on line 5 by the FUTA tax of .008 on line 6. The taxpayer would receive the maximum credit of 5.4% against the gross federal tax of 6.2% because all state unemployment contributions had to have been paid by the return due date for the taxpayer to file Form 940-EZ.

  5. Use Form 940 adjustment procedures to resolve cases.

21.7.3.4.18  (01-01-2005)
FUTA Electronic Filing

  1. There are currently two options to file Form 940 electronically. Publication 3715, Technical Specifications Guide for the Electronic Filing of Form 940, Employer's Federal Unemployment Tax Return, contains information on both programs. ( Publication 3715 can be accessed at http://www.irs.gov/.)

21.7.3.4.18.1  (01-28-2005)
940 e-file Options

  1. All e-file information concerning electronic filing options for Form 940 is contained in IRM 3.42.4, IRS e-file for Business Tax Returns.

  2. Since January 1, 2003, the Form 940 e-file program is processed at the Cincinnati Submission Processing Campus (CSPC).

  3. Additional information can be obtained by calling/corresponding with CSPC:

    Cincinnati Electronic Filing Help Desk
    201 W Rivercenter Blvd.
    Covington, KY 41011
    Attn.: ELF Unit, Stop 2701
    Phone: 866-255-0654

21.7.3.4.18.2  (10-01-2008)
Form 940 Electronic Filing Location Codes

  1. All efiled Forms 940 can be recognized on TXMOD by their unique Filing Location Codes (FLC)/Document Codes (Doc Codes). The table below aids in determining which program the taxpayer used to file:

    Program Tax Year FLC Doc Code
    940 e-file 2002 and prior 72 TCC 39
    940 On-Line Filing 2002 and prior 76 AUSPC 39
    940 Mag Tape 2002 and prior 08 ANSPC
    28 PSPC
    89 FSPC     		39
    940 e-file 2003 and current 26 CSPC 39
    940 On-Line Filing 2003 and current 27 CSPC 39
    940 e-file XML 2003 and current 35 CSPC
    38 CSPC     		39
    940-PR e-file XML 2003 and current 78 OSPC 39


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