Form 940 Exempt Payments not calculating correctly

I'm here to help share information about your payroll form, @walkupse.

We've prepared instructions for customers who are having trouble with exempt payment (Line 4) of Form 940. To start our troubleshooting, let's first understand where the error came from.

The following payroll items listed below are exempt from Federal Unemployment, but was set up to calculate it:

• Fringe benefits 
• Group Term Life Insurance (GTLI)
• Retirement plans
• Dependent care

Therefore, will have to fix the tracking type of these items:

1. Go to Lists, select Payroll Item List.
2. Right-click the payroll item, and choose Edit Payroll Item.
3. Select Next until you get to Tax Tracking Type.
4. Make sure the tax tracking type selected matches the payroll item used. Don’t use tax tracking type Other. 
   
   • If the tax tracking type is correct, go to Step 5. 
   • If the tax tracking type is incorrect, select the correct one, then click Next twice, then Finish. Go to the next section in this article Step 3: Fix your employee wages. 
5. Click Next. 
6. From the Taxes window, review the Federal Unemployment tax. 
   
   • If Federal Unemployment is unchecked, check it
   • If Federal Unemployment is checked, uncheck it 
7. Select Next.
8.  Click Finish.

Once done, continue following the steps outlined in this article to fix the wages of your employees: Troubleshoot Form 940 in QuickBooks Desktop Payroll.

I'm adding this reference for tips and guides to utilize in preparation for the coming year-end: Complete Certain Tasks in QuickBooks Desktop Payroll to Prepare for the New Fiscal or Calendar Year.

Don't hesitate to post again here if you have other questions or concerns with payroll forms. I'm always around happy to help. Take care and stay safe!

This is not a very helpful answer.  I have confirmed that the following classification items all have the correct tax tracking.  They are showing up correctly in the classifications section of the 940. Those items were not set up to calculate FUTA like your response states. 

• Fringe benefits 
• Group Term Life Insurance (GTLI)
• Retirement plans
• Dependent care

Are you telling me to go through these payroll items and simply reverse whatever is already selected for Federal Unemployment in the Taxes section?  They are already correct so that makes no sense.

How can I find out exactly what items QuickBooks is using to calculate the number in Line 4?

Thanks for getting back with the Community, walkupse. I appreciate you performing some of the steps recommended by JonpriL.
 

You can find out which items QuickBooks uses to calculate the amount in Line 4 of 940 forms by running a payroll checkup.
 

Here's how:

1. Create and save a backup of your company file.
2. In the top menu bar, go to Employees, then My Payroll Service.
3. Click Run Payroll Checkup.
4. Follow your onscreen instructions.
5. Select Continue.

If you find any discrepancies in the payroll data, your Payroll Data Review report can help identify the source of the discrepancy.
 

I've also included a detailed resource about performing payroll checkups which may come in handy moving forward: Run payroll checkup
 

I'll be here to help if there's any questions. Have a lovely day!

Hi,

I am not able to run Payroll Checkup because I have two insurance benefit items that are S-Corp Dental/Health Insurance.  They are set up as SCorp Pd Med Premium which Quickbooks is flagging as a nonstandard tax tracking type, and will not let me move past.  How can I get past this problem?

Hi there, walkupse,

You'll want to check if there are employees who were exempted but at some point, their paychecks were not taxed. It's also possible that you have a pre-tax payroll item in the system.

To get past this incorrect calculation, you can manually create an adjustment for each employee. For instructions and detailed steps, please refer to this ink: Entering wage base and tax adjustment to correct employee's quarter (qtd) or year to date (ytd) tota....

Once done, you can start filing your 940 returns in QuickBooks. Check out this article as your guide: Learn how to e-file your federal tax forms and e-pay your federal taxes electronically. It detailed steps and has a quick video tutorial.

Stay in touch with me if there's anything else you need about the data in Line 4 on form 940. I'll be around until you're able to get the correct calculation.

I am not sure how this solves my problem.  It doesn't seem like you understand my question. The wage base for FUTA is correct for each employee.  Are you saying I need to adjust the wage base for something else?  All I am trying to do is get Line 4 to calculate correctly.

We do have pretax payroll items.  Are you saying that QuickBooks cannot account for pretax payroll items on Form 940?  I have not had issues with this form until the last two years, and I have not changed the configuration of any pre-tax payroll items.

I am going to fill out the Form 940 myself and override the necessary items, since it doesn't seem like QuickBooks has a solution for my problem, or even understands what the issue is.

Also just so you know, the form is not including FFCRA or ARPA paid leave in the total payments to employees (Line 1).  This has been a problem since last year and I'm shocked it's not been resolved yet.  Those payments are not exempt from FUTA.

Quickbooks do not want to answer the phone.

Thanks for the clarification, @walkupse. 

I'll share details and sample calculations on how QuickBooks Desktop (QBDT) Payroll calculates Line 4. This way, I can guide you accordingly.

To show the payments types exempt from FUTA tax, I'd suggest checking the appropriate boxes on lines 4a through 4e. Note that you only report a payment as exempt from FUTA tax on line 4 if you included the amount in line 3. Some amounts are exempt from FUTA tax as costs aren't covered in wages or services aren't included in the employment. 

Example for Line 3: 

You had three employees. You paid $44,000 to Joan Rose, $8,000 to Sara Blue, and $16,000 to John Green. 

$44,000 - Amount paid to Joan 

8,000 - Amount paid to Sara 

+ 16,000 Amount paid to John 

Total payments to employees are $68,000. 

For Line 4: 

You had three employees. You paid $44,000 to Joan Rose, counting $2,000 in health insurance benefits. Than $8,000 to Sara Blue, plus $500 in retirement benefits. You paid $16,000 to John Green, including $2,000 in health and retirement benefits.

$2,000- Health insurance benefits for Joan 

500 - Retirement benefits for Sara 

+ 2,000 - Health and retirement benefits for John 

Total payments exempt from FUTA tax are $4,500. That said, you enter this amount on line 4 and check boxes 4a and 4c.

For complete explanation, see this link: 2021 Instructions for Form 940.

QuickBooks can account for the pretax. In some cases, pretax payroll items can cause this problem, especially if the setup is incorrect. To troubleshoot this, visit this link: Troubleshoot Part 2 on Form 940 in QBDT.

Concerning the FFCRA or ARPA paid leave that isn't included in the payment, ensure they are tracked in QuickBooks correctly. So this will show the amount in your Form 940. For more information, check out this article: Track paid leave and sick time for the coronavirus in QBDT Payroll.

Once everything is in order, you can now file your Form 940. Then you can always check the statuses of your forms by going to Payroll Center. Check out this link for the complete steps: Check e-file or e-pay status in QBDT.

Lastly, click this link to get answers to 940 frequently asked questions: About Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

Feel free to tag me in your comment if you need further assistance concerning 940. I'll keep my notifications open. Keep safe, walkupse.

I'm having the same issue. QBDT Enterprise 22 hosted on Right Networks.

I've read through the responses here and still have been unable to track down the discrepancy. Is there not an easier way, via generating reports, to track down the discrepancy between what Quickbooks reports in the total under 'Specify any exempt payments' of the Form 940 interview and Part 2 Line 4 on the form? 

I did follow those instructions by doing the payroll check up. QuickBooks found no errors or discrepancies in the payroll. For whatever reason the exempt payment amount on my 940 is equal to the gross compensation per pay for 1 employee who is paid the exact same salary 2x per month.  None of the payroll details changed for this particular employee, and the payroll item was never changed throughout the year. There are multiple employees who are paid using the same payroll item, but QB is only exempting 1 check for 1 guy on the 940.This payroll item is checked "Subject to FUTA" and this company has ZERO fringe benefits, group-term life insurance, dependent care, or retirement/pension. Every one of the employees are on salary and reached the full FUTA taxable wage amount. I'm inclined to believe it's an error within your system, and it's downright misleading for QB to automatically self-calculate and fill in an IRS form with an amount that the system cannot provide any sort of report showing where that amount came from.

Hi,

I figured out a solution if there aren't too many employees. If you run a payroll summary (Reports>Employees & Payroll > Payroll Summary) for the year, go all the way to the TOTAL column at the end of the report and double click on the total Federal Unemployment Tax for the year. Customize the report at the top by changing the "Total By" to "Employee". This will sum up the Income Subject To Tax, Wage Base, and accrued FUTA by employee. Compare each employee's "Income Subject To Tax" total to what their correct compensation subject to FUTA should be (Use Gross Pay for the year on the payroll summary less any deduction or compensation not subject to FUTA). Any discrepancy between these two amounts will be your issue. The wage base and accrued tax can all be correct (like mine was) but the "Income Subject To Tax" amount was incorrect for one employee. The "Income Subject To Tax" amount directly transfers to Line 5 of the 940. This will help you find the hidden amounts not classified in the interview screen, but affecting Line 4 of the 940. I had to do a liability adjustment to just the "Income Subject To Tax" for FUTA to the correct amount, and it got rid of anything additional affecting Line 4. If your Exempt Payments on the interview screen and Line 3 of the 940 is correct, do line 3 less your exempt payments. The difference between that amount and line 5 of the 940 is what you need to make a FUTA liability adjustment to just the "income subject to tax" amounts. @walkupse hope this solves your issue. 

@ZenoDavis: Madam or sir, you have singlehandedly made my life easier. Following your instructions, I was able to correctly calculate the discrepancy for the Form 940 error using the reports you referenced. I actually had multiple impacted employees. I'm now on to digging in a bit further to see what caused the issue. I can't say thank you enough... you really helped me out. Thanks for taking the time.

I came across this issue a couple weeks back and couldn't find any help at all. So I put it on the back burner until I could devote more time to it, did another Google search, and came up with this thread. So I ran the reports like you suggested and found that the Line 3 Total payments to all employees was off. Now the company I did the report on, we stopped paying wages back in November because we sold that company. So I was trying to figure out how to make this adjustment or what, and I ran a new 940. To this point I had done NOTHING as far as adjustments or anything. But the 940 came out correct! I don't know if there was an update in the last 2 weeks or what happened. So I did it on another company that was showing a discrepancy two weeks ago and lo and behold, that one is correct now as well. I have my updates set to auto, and everything was up to date two weeks ago. Don't know what happened...not going to argue...I'm just going to go with it!

I ran a Payroll check up and I now have a Liability's Adjustment on 60% of my employees the majority are in the amount of -111.68 but some are more.

Also my 940 is now showing $84,796.00 additional fringe benefits.  I will have to reconcile this before being able to process my 940 code this be an insurance coding problem?

I am having a similar problem any solutions yet?

Let's make sure that you're able to file the form with the correct amounts, KellyB206.

Most of the time, amounts listed in Line 4 (exempt payments) are for the payroll items that were not taxed for Federal Unemployment. It includes Fringe benefits, Group Term Life Insurance, Retirement/Pension, Dependent Care and other exempt payments. 

If you selected the "Federal Unemployment" tax setting for a particular payroll item when setting it up, the amount for that payroll item is calculated before FUTA withholding. QuickBooks includes the amount for that payroll item in the Exempt Payments total.

You can run a Payroll Item Listing report to see the tax tracking types assigned to your payroll items in QuickBooks.

Just go to the Reports menu, choose Employees & Payroll, and then click Payroll Item Listing. The Payroll Item Listing report displays detailed information about all defined payroll items, including their tax tracking types. With this report, you can identify the items that impact the amount on Line 4.

Next, run a Payroll Summary report for the Form 940 filing period and note the amounts for the payroll items with the matching tax tracking types.

You can go back to the Reports menu, scroll-down to Employees & Payroll, and then click Payroll Summary. If necessary, change the date range in the report window. You can also filter the Payroll Summary report to show only the desired payroll items and their amounts.

Additional information about the cause of the issue is discussed here as well: Troubleshoot Part 2 on Form 940 in QuickBooks Desktop Payroll Enhanced.

Please take note that you may need to create a payroll liability adjustment to correct the amounts. Check out these articles as your guide: 

• Adjust Payroll Liabilities in QuickBooks Desktop
• Entering Wage Base and Tax Adjustment to Correct Employee's Quarter (qtd) or Year to Date (ytd) Tota...

Just in case you're still getting the same issue, you can reach out to our payroll support team. They can help you review your payroll reports via screen-share to make sure that you're able to file your Form 940 with the correct amounts. Go to this article to get their contact details: Contact Payroll Support

Don't hesitate to ask follow-up questions if still need more help form us. The Community would be more than happy to guide you all the time.

Thank you so much ZenoDavis! This solved my problem that I have been experiencing for 2 years in a row.

Go to settings in each of your compensation payroll items and check whether it's been marked exempt from FUTA or not. Do the same thing in each of your employees to ensure they are all checked subject to FUTA

I also want to THANK YOU!  I read article after article trying to find the solution and your instructions were perfect.  I had one employee that I must not have checked the box for FUTA tax and that one employees FULL wages for the year were not included, and it was easy to spot by your instructions because that employee wasn't even listed.

I'd like to add one bit of instruction for anyone else that makes a similar mistake :  I ran the 940 again and still got the same figures so I went down the internet rabbit hole to find out how to make it retroactive to the first of the year with no luck, BUT what you do is do a liability adjustment.  I did the following instructions and clicked on the name of my missing employee - clicked on the FUTA tax - and added his full payroll gross amount. Hit okay - then ran the 940 again and it was perfect to the penny. :

You can create a payroll liability adjustment if the amount owed on the pay taxes and other liabilities is incorrect. Here's how:

1. Go to the Employees menu, then Payroll Taxes and Liabilities.
2. Choose Adjust Payroll Liabilities.
3. Tick Employee and then select the employee.
4. Complete the Taxes and Liabilities fields using the amounts you have in your scheduled liability window.
5. Tap Accounts Affected and mark the Do not affect account radio button. This is to make sure you don't double your payment record.
6. Click OK and then OK to close the liability adjustment window.

I'm so glad to hear you were able to find the answer you needed here in the Community, natalieb1! Also want to say thanks for sharing those additional steps for the payroll liability adjustment.

This thread is a great example of what makes the Community so great - fellow QuickBooks users, always eager to lend a hand. You know where to come if you need any assistance again in the future. Take care!