Form 940 in QuickBooks: Interview Process, Credit Reduction, and Business Name Control
QuickBooks users filing Form 940 encounter an interview worksheet, Schedule A credit reduction rules, and Business Name Control verification requirements that can affect e-filing.
When employers open Form 940 in QuickBooks to file their annual federal unemployment (FUTA) tax return, the software launches an interview worksheet before presenting the form itself. The questions in this interview are designed to gather the information QuickBooks needs to populate Form 940 correctly — and several of the topics it touches on have tripped up users who are not prepared for them.
The Form 940 Interview Sheet
The interview covers wages, exemptions, and state unemployment details. QuickBooks uses the answers to calculate the tax liability and populate the appropriate lines on the return.
One detail that has caused confusion involves qualified moving expense reimbursements. These are not exempt from FUTA tax and should not be included on line 4 of Form 940. On the other hand, income from qualified equity grants under section 83(i) is exempt from FUTA taxes and is categorized as an “other exempt payment” on the return.
Schedule A and Credit Reduction
QuickBooks generates Schedule A (Form 940) in two situations: when an employer pays state unemployment insurance (SUI) tax to more than one state, or when an employer is subject to FUTA credit reduction.
Credit reduction applies to states that have not repaid money borrowed from the federal government to pay unemployment benefits. The U.S. Department of Labor determines which states fall into this category each year. If an employer paid FUTA-taxable wages that were also subject to state unemployment taxes in a state with a credit reduction rate greater than zero, that employer owes additional federal unemployment tax when filing Form 940.
The IRS has published a FAQ page on FUTA Credit Reduction that includes links to the Department of Labor’s list of final credit reduction states. Employers who operate in the Virgin Islands have been specifically flagged as subject to credit reduction, since wages subject to that territory’s unemployment compensation laws fall under these rules.
QuickBooks calculates the credit reduction adjustment using Schedule A, which feeds into the overall Form 940 computation. The Computation of State Unemployment Credit Adjustment Worksheet works in tandem with Schedule A to produce the final numbers.
Business Name Control and E-Filing
One of the more technical hurdles users encounter during Form 940 e-filing is the Business Name Control. This identifier is used to verify the employer’s Federal Employer Identification Number (FEIN) and legal business name against the IRS’s National Account Profile database. If the name and FEIN do not match what the IRS has on file, the e-filed return can be rejected.
QuickBooks derives the Business Name Control from the legal business name entered in the company setup. In most cases, it consists of the first four alphanumeric characters of that name. The ampersand and hyphen are the only special characters allowed.
Common Exceptions
Several exceptions to the standard four-character rule can cause mismatches:
- Individual names used as business names: When a sole proprietor files using a personal name rather than a registered business name, the Business Name Control is taken from the first four letters of the last name.
- Business names beginning with “The”: If the legal name starts with “The” followed by a space and more than one additional word, the word “The” is omitted from the Business Name Control. If “The” is followed by only one word, it is included.
- Special characters and punctuation: Characters other than ampersands and hyphens are stripped out, which can shift which characters make up the four-position identifier.
Because the IRS validates this value against its own records, the legal business name in QuickBooks must match the name on file with the IRS exactly. Employers who registered under a slightly different variation of their name — or who recently changed their legal name — may need to adjust the calculated value before e-filing.
What to Check Before Filing
The Form 940 interview in QuickBooks is straightforward, but the underlying details require attention. Employers should confirm whether any of their wages were paid in a credit reduction state, verify that exempt and non-exempt payments are categorized correctly, and double-check that the legal business name in QuickBooks matches IRS records before submitting the return electronically. For users dealing with broader payroll and filing issues, understanding how QuickBooks handles these calculations can prevent rejected returns and unexpected tax adjustments.