DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 25-92
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	DONALD J. KULICK Administrator for Regional Management
SUBJECT	:	Identifying Tax Items on Employer Contribution Reports

1. Purpose. To notify State employment security agencies (SESAs) that only "contributions" to the State unemployment fund may be reported by employers on quarterly contribution reports on lines designated for contributions, contributions due and contributions paid.

2. References. Federal Unemployment Tax Act, Section 3302-Credits Against Tax, Section 3306(f)-Unemployment Fund, Section 3306(g)-Contributions; General Administration Letter No. 4-91, Allocation of Costs of Assessing and Collecting State Taxes.

3. Background. Employers pay two unemployment taxes: "contributions" under State unemployment compensation (UC) laws and a Federal unemployment tax under the Federal Unemployment Tax Act (FUTA). The FUTA tax is 6.2% of the first $7,000 in wages paid to each employee. Up to 90% of the FUTA tax may be offset by employer contributions to State unemployment funds during the year on FUTA wages. FUTA Section 3306(f) defines "unemployment fund" as follows:

   For purposes of this chapter, the term "unemployment fund" means a special fund, established under a State law and administered by a State agency, for the payment of compensation. Any sums standing to the account of the State agency in the Unemployment Trust Fund ... shall be deemed to be a part of the unemployment fund of the State, and no sums paid out of the Unemployment Trust Fund to such State agency shall cease to be a part of the unemployment fund of the State until expended by such State agency. An unemployment fund shall be deemed to be maintained during a taxable year only if throughout such year ... no part of the moneys of such fund was expended for any purpose other than the payment of compensation (exclusive of expenses of administration) and for refunds of sums erroneously paid into such fund ....

   FUTA Section 3306(g) defines "contributions" as follows:

   For purposes of this chapter, the term "contributions" means payments required by a State law to be made into an unemployment fund by any person on account of having individuals in his employ, to the extent that such payments are made by him without being deducted or deductible from the remuneration of individuals in his employ.

   When employers complete their Employer's Annual Federal Unemployment (FUTA) Tax Return, Form 940, they take credit for all contributions they paid to State unemployment funds. States are obligated to deposit all employer contributions in their State unemployment funds to be used for the payment of UC benefits. States must also certify to the Internal Revenue Service (IRS) that the contributions have actually been paid. Several States have enacted legislation which imposes additional payroll taxes on employers related to employment security or employment and training objectives, as well as other purposes. The revenue, produced by these employment and wage based taxes, surcharges or special payroll assessments, is often reported and paid by employers on their quarterly UC contribution reports. Any such amounts required to be reported and paid by an employer, which are not payments to the State unemployment fund, are not "contributions" for purposes of determining the offset credit permitted under FUTA, Section 3302.

   Using the UC reporting system to collect non-contributions revenue is permissible as long as such revenue is separately accounted for by the State UI agency, and collecting and processing costs are properly allocated and funded pursuant to General Administration Letter No. 4-91.

4. Statement of Problem. The Employment and Training Administration (ETA) has been advised by the IRS that their Service Centers are experiencing proof of credit problems because employers in some States are overstating contributions on their FUTA Form 940s. The overstated amounts are reflected as discrepant claims for credit on the tapes provided to the IRS Service Centers responsible for the Nationwide System for Computerized Certification of State FUTA Credits (940 Certification Program). In these cases, the entire offset credit will be disallowed or questioned by the IRS, thereby requiring manual Form 940 recertification by the State agency and/or additional documentation of State UC contributions paid from the employer. It appears from these problems that the impact of collecting special taxes and surcharges concomitant with employer contributions has not been fully considered in some cases. Employers who are unable to distinguish between UC contributions and non-contributions and thus lose their offset credit are confronted with obtaining from the SESA, a certification of the correct amount of contributions paid to the State UC fund and/or providing the IRS with acceptable alternative evidence of the amount paid. In addition to the employers' aggravation with the problem, the recertification of discrepancy tapes and manual recertification of FUTA offset credits generates additional workload for State agencies and the IRS.

5. Policy Guidance to the States. Only State taxable UC wages (as defined in State law) and contributions to a State unemployment fund may be counted by employers in determining the amount of offset credit they may claim against their FUTA liability. Only contributions received in the State unemployment fund may be included by a State in the Nationwide System for Computerized Certification of State FUTA Credits (940 Certification Program). A State using its UC contributions reporting system to collect a non-contributions tax or other surcharge not used to pay UC must take into consideration the impact of the action on employers' FUTA reporting responsibility and the State's 940 certification program obligation.

   The following policy guidance is provided for collecting non-contributions through the UC contributions reporting system:

   1. Employers must be able to identify and report State UC contributions separately from other taxes, surcharges and assessments on quarterly contribution reports.

   2. Employer contributions to the State unemployment fund must be paid on the basis of the employer's contribution rate and certifiable in the State UI data base for 940 certification program purposes.

   3. UC taxable wages must be shown separately on the contribution report if they are different from wages subject to other taxes or surcharges.

   4. Restrictions apply to determining and paying the cost of collecting non-UC contributions through the State UC reporting system with Title III grants. Guidelines for assessing and collecting special taxes and surcharges for other UI program and non-UI program uses are provided in General Administration Letter No. 4-91, Allocation of Costs of Assessing and Collecting State Taxes.

6. Action Required. State administrators responsible for collecting and processing non-contributions through their State UC reporting system are requested to review their forms and procedures to:

   1. Assure that only UC contributions to the State unemployment fund are reported by employers on quarterly contribution reports on lines designated for contributions due and contributions payable.

   2. Assure that UC wages are shown separately on the report if non-contribution revenue is collected on a different wage base than UC contributions.

   3. Assure that the administrative costs of non-contributions reported and paid on the UC contribution reports are properly allocated to the appropriate funding source.

7. Inquiries. Direct inquiries to the appropriate Regional Office.