21.7.3. Unemployment Taxes

(1) The Federal Unemployment Tax Act (FUTA) provides for cooperation between states and the federal government in the establishment and administration of unemployment insurance. Unemployment insurance is a system which provides benefits for unemployed workers. 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 unemployed workers.

(2) Employees in the Accounts Management (AM) and Field Assistance (FA) organizations respond to taxpayer inquiries (in-person, phone, and paper) as well as claims, certain applications, internal requests, and transcripts related to Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

(1) In addition to all official guidance on general tax matters, the administration of the unemployment tax discussed in this IRM is based primarily on tax law provisions found under U.S. Code, Title 26, Internal Revenue Code, Subtitle C, Chapter 23, Federal Unemployment Tax Act (Section 3301 through Section 3311), and related regulations, treasury decisions, revenue procedures, revenue rulings, notices, tax forms and instructions, and publications.

(2) IRM 1.2.1.13, Policy Statements for Customer Account Services Activities, contains the policy statements used by this program:

• Policy Statement 21-1 (Formerly P-6-1) - Service Commitment to Taxpayers Service Program

• Policy Statement 21-2 (Formerly P-6-10) - The public impact of clarity, consistency, and impartiality in dealing with tax problems must be given high priority

• Policy Statement 21-3 (Formerly P-6-12) - Timeliness and Quality of Taxpayer Correspondence

• Policy Statement 21-4 (Formerly P-6-13) - One-stop service defined

• Policy Statement 21-5 (Formerly P-6-40) - Assistance furnished to taxpayers in the correction of accounts

(1) The Director of Accounts Management has oversight responsibility for this IRM.

(2) Accounts Management Policy and Procedures BMF (PPB) has responsibility for this IRM content which issues guidance to employees who assist taxpayers with resolving account issues and processing amended returns. These procedures include Internal Data Retrieval System (IDRS) input instructions. This IRM is published on an annual basis.

(3) Site management officials are responsible for providing daily program support through quality review, training, timely communication of procedural changes within the program, and elevation of guidance gaps.

(4) Employees working the program are responsible for following IRM guidance, completing assigned training, reviewing updates during read time, and reporting guidance gaps to management.

(1) Program management and review is essential for achieving the program goals identified in the Accounts Management Program Letter. The program effectiveness is determined by employees successfully using IRM guidance to perform necessary account actions and duties. The unemployment tax inventory is combined with other BMF inventory streams and randomly selected for review. Centralized Evaluative Review (CER) and site mangers set the review allocation, so the employee receives a balance of phone and paper reviews relative to an employee's work assignments.

(2) The program monitoring and work reviews are performed for the following reasons:

• To make an objective assessment of an employee's performance on an ongoing basis and to ensure that adequate information is available for mid-year and annual appraisals

• To protect the rights of customers

• To identify error trends and training needs

(3) Centralized Evaluative Review (CER) conduct quality telephone reviews through Verint and correspondence reviews through the Correspondence Imaging Inventory (CII).

(4) Site managers conduct the following types of reviews:

• Inventory Management using the CCA 4243, IDRS Automated Age Listing (AAL) and CCA 4244, IDRS Multiple Case Control Listing. Aged listings are available on the Control-D/Web Access server, which has a login program control.

• IDRS Security Reviews.

• Performance reviews on effective case and call resolution according to IRM guidelines.

• Side-by-side non-evaluative reviews for skill development.

• Reviews of closed cases for both accuracy and productivity to determine if work is being closed in an efficient and effective manner.

• Workload reviews to assess whether the amount of time being spent is commensurate with the complexity and type of work.

• Reviews of cases currently in process to ensure that inventory is being closed according to received date and that cases are not necessarily suspended.

(1) The unemployment tax inventory is combined with other BMF inventory streams and subject to Accounts Management enterprise controls. This program is included with all BMF management reviews and operational reviews.

(2) Accounts Management uses the Embedded Quality Review Program to review closed case work. The Quality Review process provides a method to monitor, measure, and improve the quality of work. Quality Review data is used to provide quality statistics for the IRS’s Business Results portion of the Balanced Measures, and/or to identify trends, problem areas, training needs, and opportunities for improvement.

(3) Centralized Quality Review System (CQRS) is operated by the Joint Operations Center (JOC) to provide independent quality review services for all product lines.

(4) Local reviews are performed to focus attention on programs that require improvement. The local quality reviews are performed by staff reporting to the Quality Assurance Manager, Corrective and Preventative Action System Manager (CPAS), or other units that have quality assurance duties. Local quality reviews are also used for employee development and on-the-job instruction.

(5) Quality Review data is used by management to provide a basis for measuring and improving program effectiveness by identifying:

• Defect(s) resulting from site or systemic action(s) or inaction(s)

• Driver(s) of customer accuracy

• Reason(s) for defect occurrence

• Defect trends

• Recommendation(s) for corrective action

• Training needs

(1) The ReferenceNet Legal and Tax Research Service page provides an Acronym Database to research acronyms found within this IRM.

(2) All but the most common acronyms found in this IRM are spelled out when they are used for the first time in a subsection. The following table provides some common acronyms:

(1) IRM 4.19.5, Certification of State Federal Unemployment Tax Act (FUTA) Credits

(2) Exhibit 21.2.2-2, Accounts Management Mandated IAT Tools

(3) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

(4) Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

(5) Publication 15, Circular E, Employer's Tax Guide

(6) Accounts Management Case Management Guidelines Job Aid

(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 10 additional calendar days. If the due date for filing falls on a Saturday, Sunday, or legal holiday, employers may file the return on the next business day.

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

3. The tax class is 8. The tax class identifies amounts reported to the Treasury and transferred to various trust funds. The tax class is not used to input an adjustment.

(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.

(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

(1) For deposit requirements see:

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

• Instructions for Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

• IRM 20.1.4.9, Form 940 Deposit Rules

(2) The Federal Unemployment Tax Act (FUTA) threshold to carry a quarterly tax liability to the next quarter is $500.

(3) Form 940 balance due payments, including balances that are up to 10 years past due, can be made by phone or by using a credit card online. Payments can be made through several authorized third-party service providers who can 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 21.2.1.48.6(7), Credit or Debit Card Payments (Pay by Phone or Internet).

(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 which are exempt from FUTA tax

• Amounts paid to each employee over $7,000

(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.

(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.

(1) 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 can be credited against the employer's federal unemployment tax. The credit is limited to 5.4 percent of the federal taxable wages.

(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

(1) If the taxpayer checks box "b" on Form 940 or Form 940 (PR), 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.

(1) The IRS uses the FUTA Certification program to determine whether Form 940 or Schedule H (Form 1040) reported state payments were 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 decreases. The download to the FCP system is identified by the FUTA Release Year. The October 2024 download is identified as the FUTA Release 2022.

(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 are recognized by the following non-refile blocking series (BS):

• 50 for Non-zero certification (when the state certifies wages/contributions)

• 51 for Zero certification (when the state certifies no record of wages/contributions)

(3) The program issues the following letters:

• Letter 4010C, FUTA Certification - Proposed Increase to FUTA Tax

• Letter 4011C, FUTA Certification - Proposed Decrease to FUTA Tax

• Letter 380C, State Certification Tax Adjustment Explained: Form 940/Schedule H

(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 the referral guidance under IRM 4.19.5.4.13, Customer Service Representative (CSR) Information.

(5) Route all correspondence and amended returns (both numbered and unnumbered) regarding a FUTA assessment to:

Cincinnati FUTA Case Processing
Fax - 855-755-3513
Stop 815G
7940 Kentucky Drive
Florence, KY 41042

(1) Manual certification is required when the transaction code (TC) 150 is an IRC 6020 (b) assessment and one of the following apply:

1. The taxpayer is computing the tax at a rate less than the full applicable rate of 6.0 percent.

2. The taxpayer is filing a zero return and BMFOLU shows wages in the Processed (W2) column for the TC 150 IRC 6020(b) tax period.

(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 Federal Unemployment Tax Act (FUTA) liaison.

(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. If the tax period is not found under CC BMFOLU, use CC IRPTRI to determine whether Forms W-2 were processed for the tax 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.

(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 the Form 940 due date.

(3) A worksheet (Line 10 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.

(1) If taxable Federal Unemployment Tax Act (FUTA) wages were paid to employees in more than one state, Form 940 filers must complete and file Schedule A, Multi-State Employer and Credit Reduction Information. The Schedule A is also used to report wages paid in any state subject to credit reduction. See IRM 21.7.3.4.10, Credit Reduction States, for additional information.

(2) The tax liability for multiple state cases is computed the same as single state cases; however, the additional credit is computed for each individual state. See IRM 21.7.3.4.4, Additional Credit Computation, for computation procedures. After the tax liability is computed for each individual state, the results are combined into one amount and only one tax item reference code is used to adjust the tax liability. The primary state is used to adjust the tax. IRM 21.7.3.4.7, Item Reference Codes (Form 940), provides item reference code determination guidance.

(3) The primary state wage item reference code is used for all wages not associated with a credit reduction state. The wages of a credit reduction state must always be adjusted for the exact amount of the change. When the credit reduction state wages have been adjusted and there are left-over wages, the left-over wages are adjusted under the primary state wage item reference code. 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. 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.

(1) Only agents of home care service recipients authorized under IRC 3504 may file an aggregate Form 940. See Rev. Proc. 2013-39 for additional information.

(2) Some aggregate returns are distinguished by showing the following in the entity area or noted on the tax return:

• "State"

• "City"

• "County"

• "Notice 2003-70"

• "Fiscal Agent"

• "Fiscal Intermediary"

• "Employer Agent"

• "Choreworkers"

(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).

(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 the 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 is used however, if any of the states being amended were 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, for an example.

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

(1) Consider prior adjustments on the account and follow the guidance under IRM 21.5.3.4, General Claim Procedures.

(2) Process responses to manual certification requests as follows:

(3) Interest on a refund is not allowable when the taxpayer reduces the tax because 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.

(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 using Command Code FTDPN, and instructions for using transaction code 18X to assess or adjust a FTD penalty.

(1) Entity verifies whether the taxpayer is subject to unemployment tax and forwards Form 3465, Adjustment Request, to Accounts Management (AM) for processing. See IRM 21.7.11.4.2(6), CP 172, SC Notice Requesting Follow-up Action on Entity; CP 192, Employment Code Exempts FICA/FUTA Filing Forms 940, 941, 943; Form 3465, Adjustment Request.

(2) If the account Employment Code (EC) does not show a F, T, or W, contact the sender and advise the EC must be updated to the appropriate code before the requested adjustment is input by AM. The EC is displayed under Command Codes ENMOD and BMFOLE.

(1) Employers that pay their state unemployment tax timely and in full receive a 5.4 percent credit against their Federal Unemployment Tax Act (FUTA) tax. However, the credit is reduced when a state has taken loans from the federal government to meet its state unemployment benefit 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.

(2) The Department of Labor evaluates the credit reduction status of each state and jurisdiction. The credit reduction status for each state and jurisdiction is released in November prior to the Form 940 filing due date. The following table provides the current credit reduction percentages, which includes any applicable BCR.

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

(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 Deposit Rules, for more information. If questioned by the taxpayer, instruct them to report the additional credit reduction amount with the fourth quarter's liability.

(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.

(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 (Exhibit 21.7.3-1, State Unemployment Insurance Taxable Wage Bases):

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

2. Calculate the net tax liability (Form 940 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.

(1) A minimal number of claims are received because of the permanent extension of IRC 127. Claims are allowed without requesting recertification. See IRM 21.7.2.5.9, IRC 127, Educational Exclusions, for more information.

(1) Some taxpayers erroneously report Federal Unemployment Tax Act (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.

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

(2) All e-filed Forms 940 are recognized on TXMOD by their unique Filing Location Codes (FLC)/Document Codes (Doc Codes). See IRM 3.42.4.9.2.1, Researching e-file BMF Identification Codes, paragraph (12), for more detail.

(3) IRM 3.42.4.15, Handling e-file Inquiries, contains a list of contacts and telephone numbers which are provided to callers who need assistance with electronic filing issues.