QuickBooks Small Business

2011 FORM 940 in Credit Reduction States who use QuickBooks Payroll

Written by Doug Sleeter

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.Annual Form 940

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:

940 Credit Reduction

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

FUTA Adjustment

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.

Total paid on 940

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


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About the author

Doug Sleeter

DougSleeter (@dougsleeter) is the founder and former CEO of The Sleeter Group, an international network of accounting software consultants, and the former producer of SleeterCon, an annual conference and tradeshow for accounting professionals.

In 2015, he sold The Sleeter Group to Diversified Communications (www.divcom.com) and the company has since become The Accountex Network.

He is a passionate leader of innovation and change in the small business accounting technology world. As a CPA firm veteran and former Apple Computer Evangelist, he melded his two great passions (accounting and technology) to guide developers in the innovation of new products and to educate and lead accounting professionals who serve small businesses.

Always in search of the next big thing, he is currently focusing on digital currencies and blockchain technology. He believes these technologies will change virtually everything in global commerce.

The CPA Practice Advisor recognized Doug as one of the "Top 25 Thought Leaders" in the accounting profession and he has been named to Accounting Today's "Top 100 Most Influential People in Accounting" each year 2008 through 2015. In 2013, he was recognized by Small Business Trends with the Small Business Influence Champion award.

In the early 1990s, Doug was a pioneer in developing the first QuickBooks seminars in the country and has since built the largest group of accounting software consultants in the small business accounting profession. Doug serves on several advisory boards for technology companies and has consulted with numerous industry leaders including Intuit, Sage, Apple, and Adobe Systems. 

Doug is the author of numerous books and courseware materials including The QuickBooks Consultant’s Reference Guide, and QuickBooks Complete, a college textbook.
 
Doug attended both the University of California Santa Cruz and Santa Clara University and holds a Bachelor of Arts degree in Computer Information Systems. Doug and his family live in Pleasanton, CA. Doug's hobbies include woodworking, golf, and lifelong learning.

7 Comments

  • First, QB does not calculation the correct rate at all. If an employee goes over the $7,000 max taxable income rate in any quarter, the FUTA on that quarter’s report doesn’t show correctly(QBpro 2012.)

    The difficulty for me as a business owner with just the lowest level payroll subscription is that in the past, because my liability shows way under $500 all year, I would forget, as I look at those numbers, that Ohio is a credit reduction state. Then, since it’s over $500 at the end, I have to put the quarter by quarter liabilities on the 940. QuickBooks will not produce the necessary report for me, even though it shows up as an option. Excel errors out every time with ‘no data sent.’ So… I have to make up my own reports with calculation lines and accumulative balances removed, etc.

    I wish the options for FUTA set-up in QuickBooks would allow me to put in the correct rate, with the credit reduction.

    I am trying, this year to put an additional payroll liability item for the credit reduction. Not sure how it will work.

    -N

    • It sounds like there is a setup problem because we’ve never seen the FUTA calculations failing to calculate correctly.

      Have you updated your software for the latest update and payroll updates? That could be the problem, but it’s hard to tell from what you’ve said here.

      • Yes, QB is current, payroll is current. It miscalculated last year, but I forgot about it until I ran into it again this year. (Love that “credit reduction” term, too!)

        Any other ideas?

        my 1099 report is incomplete also. I had to make my own. Now it lists an extra vendor I paid $45 to.

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