Credit Reduction Status

•Credit deductions status for any tax year is NOT determined until November of the tax year.

•A few states send out notices advising employers their state is 'expected' to be a credit reduction state, and may even imply the FUTA rate includes the credit reduction percentage.

•This type of notice is misleading because FUTA liabilities and deposits during the year never include credit reduction and credit reduction amounts are not due and payable until January of the following year.

•References

•IRS Pub 15, Depositing FUTA Tax

•For deposit purposes, figure FUTA tax quarterly.

•Determine your FUTA tax liability by multiplying the amount of taxable wages paid during the quarter by the current FUTA rate.

•IRS Form 940 Instructions

•Credit reduction state.

•A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a credit reduction state.

•The Department of Labor determines these states.

•If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940.

Your FUTA Liability

•The amount shown on the Payroll Tax Summary (your liability) is calculated using the limit and percent you enter on the Setup/Employer Paid Taxes screen.

•You should use the proper limit and percent, without any estimate for Credit Reduction.

•Although not recommended, we do allow you to enter a different percent, if you prefer to guess at your end of year credit reduction liability.

Preparing Form 940

•All active employees must be set for the same State Tax calculation.

•If you have employees with different State Tax Calculations, setup separate 'sets of data' for each State you must withhold tax for - treat each State as a separate business.

•IRS and SSA do accept multiple forms from the same employer.

•The other option is to prepare Form 940 manually.

•Just before Form 940 prints, you are given the chance to enter/confirm certain information, such as the amount already deposited.

•MAKE SURE to enter the actual amount you have actually deposited so far.

•Medlin Payroll fills in a 'default' amount which is calculated to be the exact liability (before adding Credit Reduction).

•The 'default' amount may not match what you have actually deposited so far.

•Line 11 - If you are in a Credit Reduction State, there will be a figure in Line 11.

•Line 13 - MAKE SURE THIS IS THE ACTUAL AMOUNT you have deposited (so far) for the year.

•Check your deposit records - If you included a guess for Credit Reduction in your deposits, your deposits will not add up to the 'default' figure calculated by Medlin Payroll.

•Page 2, Part 5 - Refers to your 'liability' only, not the amount you may have deposited.

•If you are in a Credit Reduction state, 16d includes the Credit Reduction amount.

•Page 2, Part 6, Third Party Designee - To print this information, there must be a designee name, phone number, and five character PIN entered on the 'information' screen (which is shown just before the report prints).

•Professional Edition - Page 2, Part 7, Paid Preparer - Enter the desired information on the 'information' screen (which is shown just before the report prints).  If the Preparer's Name is blank, none of the Paid Preparer's section is filled in.  If the Preparer's Name matches the Firm's Name, the self employed box is checked.