The following question was asked to the IRS during its April 7 payroll industry conference call:
Q. We're a South Carolina employer who expects to pay an interest surcharge on our 2011 South Carolina unemployment tax returns to help the State pay the interest on its federal unemployment insurance loans. Can we claim the surcharge as a credit on our 2011 annual federal unemployment tax (FUTA) return (Form 940)?
A. The IRS did not have a definitive answer to this question; however, it appears, based on a review of federal law and the Form 940 instructions, that the employer will not be able to include the surcharge in the credit computation.
Background. Employers pay FUTA tax at a 6.2% rate on the first $7,000 of covered wages paid to each employee during a calendar year. However, Code Sec. 3302(a) provides employers with a 5.4% credit against the FUTA tax rate for amounts paid to a state unemployment insurance fund by January 31 of the subsequent year. The credit is permitted only for the amount of state unemployment contributions (taxes) required for the taxable year, and can be taken only if state unemployment taxes have been paid by the due date of the Form 940.
Page 3 of the 2010 Form 940 instructions notes that state unemployment insurance contributions do not include “special administrative taxes.” It would appear that the South Carolina interest surcharge would be classified as a “special administrative tax,” and, therefore, the surcharge would not be included in the 5.4% credit computation.
There is a worksheet on page 8 of the 2010 Form 940 instructions that certain employers must use to compute the credit. The IRS advises employers to have their state unemployment tax rate and the amount of their taxable state unemployment wages available before completing the worksheet. The interest surcharge is not a factor in determining either an employer's state unemployment tax rate or its taxable state unemployment wages, so it appears unlikely that the surcharge can be included in the credit computation.