Adapting to the many changes made to the Internal Revenue Service (IRS) forms due to the ongoing pandemic has been one of the biggest challenges for employers. This year, Form 941, the Employer’s Quarterly Federal Tax Return, has been altered multiple times and the last revision was made in June 2021.
New Form 941 updates reflect the tax relief and legislation passed in response to the COVID-19 pandemic. Most of the updates were introduced to allow employers to claim new COVID-19 tax credits established by the American Rescue Plan Act (ARPA). In addition to this, the Form 941 instructions have also been altered. Therefore, it is critical for employers to know what has changed, and more importantly, which form to be using.
COBRA Subsidy Tax Credit
Many of the IRS Form 941 updates are made in response to the ARPA, passed earlier this year. Some of the most noticeable changes are the lines that capture information related to the Consolidated Omnibus Budget Reconciliation Act (COBRA) premium subsidy provisions of the ARPA.
Under ARPA, a 100% COBRA premium subsidy and additional COBRA enrollment rights are available to certain assistance eligible individuals (AEIs) during the period beginning on April 1, 2021, and ending on September 30, 2021. An AEI is defined as anyone who is eligible for COBRA from April 1, 2021, to September 30, 2021, due to a reduction in hours or involuntary termination. The subsidy is available until an AEI is eligible for other group health plan coverage, including Medicare. An individual may become an AEI more than once, for example, due to successive losses of coverage under the individual’s or a spouse’s plan.Use this detailed payroll taxes guide to understand tax obligations, maintain effective tax compliance, and reduce costs by avoiding penalties.
Overview of Form 941 Updates
Employers are responsible for withholding federal income tax and other payroll taxes and remitting it to the IRS. Each Form 941 they file reports the total amount of tax withheld during the quarter. The only exceptions to this filing requirement are for seasonal employers who do not pay employee wages during one or more quarters, employers of household employees, and employers of agricultural employees.
Recent Form 941 updates allow employers to claim the COBRA tax credits and include additional and altered lines in part 1 and part 3. There are also some changes due to the extension and amendment of the qualified sick and family leave credit and employee retention credit. The most recent version of Form 941 should be used for the second, third, and fourth quarters of 2021.
New Form 941 has several more worksheets included with it than usual. There are five different worksheets for employers to calculate all the tax credits available. Worksheets 1 and 3 are used for COVID-19 qualified paid family and sick leave wages. Worksheets 2 and 4 are used for employee retention credit. Employers use Worksheet 5 for COBRA tax credits.
Employers can use Worksheet 5 to determine their ARPA tax credit and need to fill out the following line items to claim the credit:
- Line 11e – Nonrefundable portion of COBRA premium assistance credit: Employers should enter the nonrefundable portion of ARPA tax credit they provided in the quarter, which is generally the amount of COBRA subsidies provided that does not exceed their Medicare tax obligations. This amount is listed under Step 2, line 2g, in Worksheet 5.
- Line 11f – Number of individuals provided COBRA premium assistance: Employers should enter the number of AEIs for which they provided a COBRA subsidy during the quarter. All AEIs covered under one COBRA plan should be counted as one individual.
- Line 13f – Refundable portion of COBRA premium assistance credit: If an employer’s tax credit exceeds their Medicare taxes, then employers should enter this amount, called the refundable portion of the COBRA premium tax credit, in line 13f. This amount is listed under Step 2, line 2h, in Worksheet 5.
Also, draft Schedule R used to report client-specific information for entities that file an aggregate Form 941 for multiple employers, has been updated to reflect the newly introduced Form 941 updates.
Staying on Top of IRS Updates
A revised draft of Form 941-X was released by the IRS to accommodate Form 941 updates. The five-page draft Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, includes new and revised lines that allow employers to report corrections related to Form 941 updates. The IRS anticipates that after the latest Form 941 updates there will not be more changes for the rest of the year. However, any last-minute updates to the law may require the agency to update the form again.
Using proper forms is essential to maintain payroll tax compliance. In addition to this, employers need to take other steps to abide by the tax regulations, wage and hour rules, and other applicable requirements related to payroll. Furthermore, COVID-19 requires employers to adapt to new laws and regulations affecting payroll tax. However, outsourcing payroll tax helps employers meet deadlines with automated payments, ensure the security of employee and business information, reduce errors, and stay current with ever-changing employment and tax regulations. As a result, with payroll tax software, employers can gain many compliance-related benefits.Outsource payroll tax to successfully manage complex and frequently changing compliance requirements while eliminating costly mistakes.