Don't include state surcharges on Form 940. Employers are entitled to get credit on their Form 940 for actual state unemployment contributions made to individual states. Confusion comes into play when the employer has to pay voluntary contributions to receive a lower unemployment rate and/or surcharges to individual state unemployment agencies. Many employers assume that any payments made to the individual states should be included in the calculation for credit. This is incorrect. Employers need to realize the following:

Contributions are payments that a state requires an employer to make to its unemployment fund for the payment of unemployment benefits. Contributions do not include:

•  Any payments deducted or deductible from your employees' pay.
 
•  Penalties, interest, or special administrative taxes (such as surcharges, employment and training taxes, excise tax, and assessments, which are generally listed as a separate item on the state's quarterly wage report) not included in the experience rate assigned to you.
 
•  Voluntary contributions paid to get a lower assigned rate.

Pay particular attention to the instructions for Form 940 - Employer's Annual Federal Unemployment (FUTA) Tax Return, Part II, Line 3, Column (i). The instructions for Form 940 are found at http://www.irs.gov. For column (i), it states the following:

Enter the contributions you actually paid to the state unemployment fund by the due date for filing Form 940. Do not include amounts you are required to pay but have not paid by the Form 940 due date (January 31 or February 10 as explained under When To File on page 2). If you are filing Form 940 after the due date, include only payments made by the return due date, and see the instructions and worksheet under Line 4 - Credit below. If you are claiming excess credits as payments of state unemployment contributions, attach a copy of the letter from your state. Do not include any penalties, interest, or special administrative taxes (such as surcharges, employment and training taxes, excise tax, and assessments, which are generally listed as a separate item on the state's quarterly wage report) not included in the experience rate assigned to you.