2011 FORM 940 in Credit Reduction States who use QuickBooks Payroll

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2011 FORM 940 in Credit Reduction States who use QuickBooks Payroll

Doug Sleeter | January 25, 2012 |

When preparing Form 940 in QuickBooks, I was surprised to find out that all of our California clients owed money! The reason for this is that California is one of the states that did not repay the money they borrowed from the federal government to pay extended unemployment benefits.

Employers in what the IRS refers to as “credit reduction states” must calculate and remit additional FUTA tax because the credit (or reduction of tax due) that employers usually receive for paying state unemployment taxes has been “reduced” in 2011. It’s all related to the extensions of the unemployment benefits voted in by congress in past year or so.

Credit Reduction States include: Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia, Virgin Islands, and Wisconsin.

So, see if you can follow the logic… They are REDUCING, the reduction, which means we get LESS of a reduction, which means we PAY MORE. Is that clear? Couldn’t they just have said, “employers in the following states need to PAY MORE.” That would be so much easier to explain. But I digress.

This “credit reduction” is calculated on Schedule A of the 2011 Form 940 (PDF), Employer’s Annual Federal Unemployment (FUTA) Tax Return.

The good news for QuickBooks users is that QuickBooks DOES calculate the correct amount on the 940, but it does NOT AUTOMATICALLY record an increase to the payroll liability account.

This makes sense to us for two reasons. First, this is a one-time adjustment that doesn’t relate to any payroll processing and second, the 940 is not calculated until the end of the year, and it calculates on the total of all wages (up to $7,000). So there would be no way for QuickBooks to know how much to accrue in the liability account until after the last payroll for the year was calculated.

So, we have to manually record a “liability adjustment” in QuickBooks to record the increased expense and liability.

Our practice is to always pay payroll taxes via e-payment and in the case of FUTA tax, we always pay all the taxes before filing FORM 940. That way the form shows all the tax calculations and it shows that we’ve paid all taxes before filing. So we recommend the following:

  1. To calculate the amount due, fill out FORM 940 in QuickBooks, but do not file it yet. Just save and close.
  2. Then, after you know the exact amount, record a liability adjustment that affects liability and expense accounts.
  3. Pay the liability via QuickBooks Pay Liabilities and use e-Pay to immediately make the deposit. Or use EFTPS and a Liab Chk transaction in QuickBooks if you don’t use e-Pay.
  4. Go back to FORM 940 and finish filling it out and file it.

Here are some screenshots of what you’ll see.

Starting in the Employee center, Click Process Payroll Forms, and select the Annual FORM 940 for 2011.

When the Form 940 is processed, QUickBooks automatically calculates the applicable credit reduction (based on your state) in Part 3 of the Interview for Form 940:

Not that you know the amount of your additional liability, you have to leave this form and come back later. Click Save and Close on the the 940 interview.

Then create a Payroll Liability Adjustment.

Here is a screen shot of the adjustment to increase the amount of FUTA by $147.00

In this case, we wanted to pay via e-payment and make the amount show up on the Form 940 when we file it. So we paid the amount due using the Pay Scheduled Liabilities Screen.

After the e-payment was processed, the total paid shows up correctly on the Form 940. Now we’re ready to finish and file FORM 940.

Many thanks for Marilyn Bell of Ontara IT Solutions for her help in researching and preparing this post.