Changes to Form 941 for COVID-19 Related Employment Tax Credits

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IRS released a new draft of the Form 941

Updated on June 08, 2020 - 10:30 AM by Admin, TaxBandits

This past April, the IRS released a new draft of the Form 941, Employer’s Quarterly Federal Tax Return for 2020, as well as updated instructions to reflect the effects of COVID-19. Please be aware that this newly drafted form is only intended to provide employers with an idea of what the final version of the form will actually look like. The official version of the 941 should be available from the IRS in the near future. Employers will be required to use the new 2020 Form 941 when they submit their second-quarter filing to the IRS. The second-quarter Form 941 deadline is July 31, 2020.

In this article, we discussed the following points:

1. What to Expect?

This new form will address the economic impacts of COVID-19 by allowing qualifying employers to defer deposits on their payroll taxes, apply for Payment Protection Program (PPP) loans, obtain employment tax credits, and claim payments towards advance credits.

Payroll credit for required sick leave:

The Families First Corona Relief Act (FFCRA) allows qualifying employers to use refundable tax credits towards paying sick-leave wages to employees from Apr 1, 2020 to Dec 31, 2020.

Payroll credit for required family leave:

The Families First Coronavirus Response Act (FFCRA) allows employers to use refundable credits to pay employees their wages while they are on family leave. This applies to wages earned between April 1, 2020 and December 31, 2020.

Employee Retention Tax Credit:

This refundable tax credit encourages employers to keep employees on payroll by granting a maximum credit of $5,000 per employee. It can be used against certain employment taxes, equaling up to 50 percent of qualified wages paid to an employee between March 12, 2020 and January 1, 2021.

2. Social Security Tax Deferral Program

Qualifying employers don’t have to wait until they file Form 941 each quarter to claim the above credits. When they pay employment taxes, employers can defer the 6.2% FICA (Social Security) portion until the end of 2021 and 2022, in anticipation of their refundable payroll tax credits.

Employers must balance their tax credits. Any leftover credits after payroll deferrals can be claimed as advanced credits using the Form 7200.

3. Revisions to Form 941

Whether an employer chooses to retain employment taxes or claim advanced payments, they will need to file Form 941. This is a quarterly form that provides a record for the IRS. Now, with new information related to the CARES-Act, it is being revised.

On April 30, 2020, the IRS released an updated draft of Form 941. Here are the significant changes:

The revised form includes 23 new data fields.

Part 1, Line 5a, includes the employee share of social security tax on qualified sick and family leave wages:

  • Line 5a (i):

    Qualified sick-leave wages.

  • Line 5a (ii):

    Qualified family-leave wages.

Form 941 for 2020

Part 1, Line 11, now includes these new data fields:

  • Line 11b:

    Non-refundable portion of credit for qualified sick and family wages.

  • Line 11c:

    Non-refundable portion of employee retention credit.

Form 941 for 2020

Part 1, Line 13, includes these new data fields:

  • Line 13b:

    The deferred amount of the employer’s share of Social Security tax.

  • Line 13c:

    Refundable portion of credits for qualified sick-leave and family-leave wages.

  • Line 13d:

    Refundable portion of employee retention credit.

  • Line 13f:

    Total advances received from filing Forms 7200 for the quarter.

  • Line 13g:

    Total deposits, deferrals, and refundable credits less advances.

Form 941 for 2020

Part 3 has these new data fields:

  • Line 19:

    Qualified health plan expenses allocable to qualified sick-leave wages.

  • Line 20:

    Qualified health plan expenses allocable to qualified family-leave wages.

  • Line 21:

    Qualified wages for the employee retention credit.

  • Line 22:

    Qualified health plan expenses allocable to wages reported for employee retention credit.

  • Line 23:

    Credit from Form 5884-C, Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

  • Line 24:

    Qualified wages paid between March 13 through March 31, 2020, to be used only for second-quarter filing.

  • Line 25:

    Qualified health plan expenses allocable to qualified wages paid between March 13 through March 31, 2020, to be used only for second-quarter filing.

Form 941 for 2020

Please visit https://www.irs.gov/pub/irs-dft/i941--dft.pdf for instructions on the new draft of IRS Form 941.

4. Credit Calculations

The credit for qualified sick and family leave wages (reported on lines 11b and 13c) and the employee retention credit (reported on lines 11c and 13d) can be calculated using Worksheet 1, available in the revised instructions for Form 941.

There are 3 steps in Worksheet 1. Complete the steps that apply to your business to calculate what credits to claim:

  • Step 1: Determines the employer share of social security tax for the quarter after it is reduced by credits claimed on Form 8974 or Form 5884-C.
  • Step 2: Sick and family leave credit calculation.
  • Step 3: Employee retention credit calculation.

If you paid both qualified sick and family leave wages and qualified wages for employee retention credit this quarter, complete Step 1, Step 2, and Step 3.

If you paid qualified sick and family leave wages this quarter but didn't pay any qualified wages for employee retention credit, complete Step 1 and Step 2.

If you paid qualified wages for employee retention credit this quarter, but you didn’t pay any qualified sick and family leave wages, complete Step 1 and Step 3.

5. Further Assistance

These updates will apply to regular Form 941, Form 941-SS, and Form 941-PR. We can also expect changes to the Aggregate version of Form 941 - Schedule R.

While we wait for the IRS to release the final revised version of Form 941, feel free to explore frequently asked questions for a fuller picture of employment tax credits and what they mean for your business.

  • For general FAQs on COVID-19 related tax credits, click here.

Please visit https://www.irs.gov/pub/irs-dft/f941--dft.pdf to view the current draft of IRS Form 941.

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