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Troubleshooting Form 940 with exempt FUTA wages

Learn how to resolve FUTA-related errors when working on Form 940 in QuickBooks Desktop Payroll Enhanced.

When working with Form 940, there are several reasons you might receive the message Total of this column does not equal the exempt payments total. The difference is <$ nn,nnn.nn>. You must make the necessary adjustments to reconcile the amounts:

The message might indicate that that items that were set up to be exempt from FUTA tax were not classified properly, or that payroll items or the employee might not have been properly set up to be subject to FUTA.

Although the employees or payroll items can still be set up correctly at this time, if they were not set up correctly at the time paychecks were created, you can still experience this problem.

The following sections guide you through the steps to resolve this error and create Form 940 with correct dollar amounts.

Due to FUTA rate change in 2011, Payroll Check Up will not work in QuickBooks Desktop for year 2011. If you need to make correction for your FUTA wages, you must make a manual liability adjustment in QuickBooks Desktop.

Classification issues

If the total at the top of Part 2: Specify your FUTA tax before adjustments is correct, the error means you have items set up to be exempt from FUTA tax, but they are not classified in the Classification section.

You need to assign the difference between the amounts at the top of Part 2: Specify your FUTA tax before adjustments and the Total line in the Classification section.

Note Intuit does not know how you should classify these. If you do not know, ask your accountant.

If you need assistance in determining or classifying your items in the Classification Section of your 940 Interview worksheet, see the step-by-step instructions provided by the IRS or consult with your accountant.

To classify the amounts:

  1. In the Amount column, select the field next to one of the listed classifications.
  2. Enter the unclassified amount that belongs in that field. If you are not sure how to classify the difference, ask your accountant or use the step-by-step instructions provided by the IRS as your guide.
  3. Repeat these steps to classify any other unclassified amounts.

Payroll item or employee settings issues

The first step in resolving payroll item or employee FUTA issues is to locate the payroll items or employees set up to be exempt from FUTA.

To do so, access the tax form worksheets, and run the tax form worksheets in Excel.

To access the tax form worksheets:

  1. From the Reports menu, under Employees & Payroll, select More Payroll Reports in Excel.
  2. Select Tax Form Worksheets.
  3. Select the specific Annual 940 form, and specify dates for the report to be run.
  4. Select Create Report.
  5. Review the tax form worksheet for the 940 in Excel and note:
    • Exempt Payments by Tax Tracking: Payroll items listed here have tax tracking set to be exempt from FUTA.
    • Additional Exempt Payments based on Taxability Settings: Payroll items listed here were set up to be exempt from FUTA tax at the time they were used.
    • Paychecks Not Tax (excluded FUTA or FUTA Comp Negative): Paychecks listed here are for employees that were not set up in QuickBooks Desktop to be subject to FUTA at the time the paychecks were created.

Use the information from this report to correct the payroll item or employee's setup or determine whether a payroll item's tax tracking is currently set up correctly.

Payroll items

If the total at the top of Part 2: Specify your FUTA tax before adjustments is not correct, you may have used one or more of the following when setting up payroll items:

  • An addition item with a tax-tracking type that exempts it from FUTA
  • A deduction item with a tax-tracking type that tracks the amounts for that deduction as exempt from FUTA
  • An addition item with taxability settings that exempt amounts for the addition item from FUTA
  • A deduction item with taxability settings that exempt the amounts deducted from the paycheck by the deduction item from FUTA

To resolve these issues:

  1. From the Lists menu, select Payroll Item List.
  2. Right-click the payroll item, and select Edit Payroll Item. For more information, see Edit the payroll item.
  3. Select Next until the Tax Tracking Type window opens.
  4. Make any corrections necessary to the tax-tracking type. If you do not know what tax-tracking type to use, ask your accountant.
  5. Select Next and select Finish.

Verify or correct a payroll item's taxability

To check whether a payroll item's taxability is currently set up correctly:

  1. From the Lists menu, select Payroll Item List.
  2. Right-click the payroll item, and select Edit Payroll Item. For more information, see Edit the payroll item.
  3. Select Next until the Taxes windows appear.
  4. Verify the Additions settings: If Federal Unemployment is selected, the addition item is set up to be added to the employee's wages on the paycheck before FUTA calculates, increasing the amount of FUTA taxes. If it is not selected, the addition item is added after FUTA calculates, so the addition item does not increase FUTA tax.
  5. Verify the Deductions settings: If Federal Unemployment is selected, the deduction item is set up to be deducted from the employee's wages before FUTA calculates, reducing the amount of FUTA taxes. If it is not selected, the deduction item is set up to be deducted from the employee's wages on the paycheck after FUTA calculates, so the deduction item does not decrease the FUTA tax.
  6. Make and save any necessary corrections to the current settings.
Note If you are not sure of the accuracy of the current tax settings for your payroll items, or employees, contact your accountant. Intuit can show you how to make changes to QuickBooks Desktop tax settings or run a payroll checkup, but it cannot offer tax advice or tell you if you tax settings are accurate or not.

Employee settings

If the total at the top of Part 2: Specify your FUTA tax before adjustments is not correct, the employee might not have been set up to be subject to FUTA when you created paychecks.

To resolve this, first identify which employees are marked for FUTA, and then verify and correct the employee's tax settings.

Check which employees are marked for FUTA

To identify employees marked for FUTA:

  1. From the Reports menu, under Employees and Payroll, select Employee Withholding.
  2. Select the Customize Report button.
  3. On the Display Tab, select only Employees and FUTA from the list to narrow the report. A Yes appears next to the names of employees marked for FUTA.
  4. Double-click an employee's name to change the setting.
  5. On the Payroll Info tab, select Taxes.
  6. Update the employee's settings.
  7. Select Ok.

Verify and correct employee tax settings

To verify the employee's tax settings and make corrections:

  1. From the Employee menu, open the employee's record for editing. See Open the Edit Employee window.
  2. Select the Payroll Info tab, and select Taxes.
  3. Review the employee's settings. If Federal Unemployment Tax (Company Paid) is not selected, the employee is currently not set up to be subject to FUTA.
  4. Make any necessary changes and save and close the employee record.
Note If you are not sure of the accuracy of the current tax settings for your payroll items, or employees, contact your accountant. Intuit can show you how to make changes to QuickBooks Desktop tax settings or run a payroll checkup, but it cannot offer tax advice or tell you if you tax settings are accurate or not.

Create manual wage base adjustment

If a payroll item's taxability was not set up correctly, employees were not marked for FUTA, or an employee's tax settings were not set up correctly, you need to create manual wage base adjustment:

  1. Open the Payroll Detail Review report, and filter it to show Social Security Employee.
  2. Enter the date range from January 1 to June 30 for FUTA rate of .8%, June 1 to December 31 for FUTA rate of .6%
  3. When you create the adjustment, the amount of Social Security income subject to tax is the FUTA income subject to tax.
  4. Enter the Wage base amount in the wage base column. Do not exceed the annual FUTA limit of 7000.
  5. Enter the tax amount by multiplying the wage base amount by the FUTA rate of the period in question.

Income subject to tax and wage base will not match if the employee reached the limit. You must still create an adjustment if an employee reached the annual limit in the 2nd quarter. The adjustment is for income subject to tax, and the wage base should be zero.

Since Payroll Check Up does not work with 940 form, you must make an adjustment to the wage base. Be aware of the annual limit. If an employee reaches the limit, the wage base and income subject to tax should not match.

Exempt payments and line 4 should match, and if there is really an employee exempt from FUTA, the amount of the exempt payments should be entered in Other.

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