Dear Client:

During 2009 Michigan employers were required to pay an extra 0.3% in Federal Unemployment Tax (FUTA). After January 31, 2010, Michigan allows certain employers to claim a credit on their Michigan Unemployment Tax returns up to 50% of the extra FUTA paid on their 2009 IRS Form 940.

To receive the credit, an employer must meet all of the following criteria:

• Has paid Michigan unemployment taxes for five years or more

• Has a tax rate for the year of the Michigan unemployment tax credit.

• Has a positive reserve ending balance in its unemployment experience account as of June 30 of the previous calendar year.

• Has filed all required quarterly tax reports for the year prior to the year of the credit. (i.e., if the Michigan unemployment tax credit is for 2010, all required quarters of 2009 must be filed).

• Has paid the additional 2009 FUTA taxes to the IRS by December 31, 2010.

• Has paid its 2009 FUTA taxes prior to submitting the Michigan unemployment tax credit application.

• Has applied for a Michigan unemployment tax credit and has certified the amount of additional 2009 FUTA taxes paid when it applies for the credit.

How can you verify that you are a positive reserve balance employer with five or more years paying state unemployment taxes?

To verify that you have paid state unemployment taxes for five years or more, review your annual Tax Rate Determination (Form 1771 UIA) for Calendar Year 2009. You are a positive balance employer if the "Equals Actual Reserve (as of 06/30/2008)" is a positive number (greater than zero) and your determination has a Nonchargeable Benefits Component (NBC).

How to become a positive reserve balance employer

If you are a negative-balance employer (that is, an employer who has paid less in state unemployment taxes than their former workers have received in unemployment benefits), and you wish to achieve a positive balance, you will need to make a voluntary (non-refundable) payment that is greater than the negative reserve balance (Actual Reserve). Such a payment will lower the tax rate and will also make you eligible for the credit. (See the voluntary payment information on the reverse side of your annual Tax Rate Determination for Calendar Year 2009.) However, sometimes the voluntary payment is more than the tax savings, so you will want to consider the benefits vs. the cost before making such a payment.

Other Important Considerations

The Michigan unemployment tax credit is non-refundable

It is applied as a credit which can be used against future Michigan unemployment tax liability.

The Michigan unemployment tax credit is non-transferable

A successor employer who did not have taxable wages of its own in the year prior to the year of the credit, and did not pay the additional FUTA tax, is not eligible. The predecessor may have been eligible, but the credit cannot be transferred to the successor.

How and when can Employers get the Michigan unemployment tax credit?

Because the additional federal taxes did not become due until January 31, 2010, the UIA has established paper and electronic processes to facilitate the tax credit application process. An application process is necessary because the UIA has no access to the extra federal unemployment taxes (FUTA) paid on an employers IRS Form 940. For applications received on or after June 1, 2010, credits will become available in the third or fourth quarter 2010, depending on when the application is received by the Agency.

How we can help:

If FPB provides you with payroll check-writing services or if we prepare your Forms 940 and UIA 1020, we will prepare and forward to you for your signature and filing the UIA Form 1110 to claim the appropriate credit.

If you use an outside payroll service (such as Paychex or ADP), we suggest that you contact that service to ensure that they will prepare the required form to claim the credit.

If you prepare your own payroll tax returns (specifically Forms 940 and UIA 1020), we encourage you to contact us if you have any questions about completing UIA Form 1110 to claim the credit. There is a webcast on how to complete UIA Form 1110 on the Michigan website: http://www.michigan.gov/uia.

We appreciate the opportunity to be of service.

FPB will continue to monitor future legislative activity, and we will do our best to keep you informed of the relative provisions as they develop. Please do not hesitate to contact us if you have additional questions about the Michigan Unemployment Tax Credit or any other tax matter.

IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication was not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties; furthermore, this communication was not intended or written to support the promotion or marketing of any of the transactions or matters it addresses.