Form 941 is an essential form for all employers that pay employees and withhold Federal, Social Security, and Medicare taxes. In recent years, several updates to Form 941 form have been introduced, making it more difficult for employers to ensure its proper completion. However, several COVID-19 legislation has been passed recently, including tax credits for employers, and Form 941 is an essential part of claiming these credits. Therefore, it is becoming increasingly important for employers to take into account not only updates to Form 941, but also to Schedule B and Schedule R in order to avoid costly disputes with the IRS resulting in penalty and interest.
Instructions for Filing of Form 941
The Internal Revenue Service (IRS) released final instructions for Form 941, Employer’s Quarterly Federal Tax Return, as well as Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, and Schedule R, Allocation Schedule for Aggregate Form 941 Filers.
Updates to Form 941 and its related schedules were made due to refundable employment tax credits, advance payment of employment tax credits, and permissible deferral of certain employment taxes provided in recent COVID-19 tax legislation.
Revisions and updates to Form 941 were necessary to accommodate the reporting of these credits:
Qualified Leave Wages
Refundable tax credits are available for paid sick leave and paid family leave or qualified leave wages, required under the Families First Coronavirus Response Act (FFCRA).
Employee Retention Credit
Updates to Form 941 also include the Employee Retention Credit (ERC), provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The ERC is equal to 50% of qualified wages paid to employees after March 12, 2020, and before Jan. 1, 2021. The ERC permits a credit of up to $5,000 per employee or a maximum of $10,000 in wages.
Advance Payment of Credits
Eligible employers file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment of the tax credits for qualified sick and qualified family leave wages and the employee retention credit. Form 7200 may be filed if there are insufficient federal employment taxes to cover the amount of the credits.
Deferred Payment of Employer Tax
CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes for deposits. This also includes payments of the employer’s share of Social Security tax that would otherwise be required to be made between March 27, 2020, and December 31, 2020. Employers have to pay half of the deferred amount at the end of 2021 and the other half at the end of 2022.Use this detailed guide to maintain payroll tax compliance, avoid potential penalties, and meet tax obligations at the local, state, and federal levels.
New Modifications and Updates to Form 941
The updated version of Form 941 includes many new fields for reporting data on coronavirus-related employment tax relief. These updates to Form 941 are identical to those introduced in the draft version of the revised Form 941 released in April 2020. The form itself has three parts, and while Part 1 and Part 3 have the new fields, Part 2 has no changes.
The new fields in part 1 require employers to provide information regarding:
- Qualified sick leave wages (line 5a (i)),
- Qualified family leave wages (line 5a (ii)),
- The nonrefundable portion of tax credits as calculated in Worksheet 1 (lines 11b and 11c),
- The deferred amount of the employer share of social security tax (line 13b),
- The refundable portion of tax credits as calculated in Worksheet 1 (lines 13c and line 13d), and
- Advances received from filing Form 7200 for the quarter (line 13f).
Furthermore, the new entries in part 3 of Form 941 require employers to provide information in connection with:
- Qualified health plan expenses allocable to qualified leave wages under the FFCRA (lines 19 and line 20),
- Qualified wages for the employee retention credit under the CARES Act (line 21),
- Qualified health plan expenses allocable to qualified employee retention credit wages (line 22),
- Credit received from filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans (line 23), and
- Qualified wages for the employee retention credit and allocable health plan expenses paid during the first quarter from March 13 through March 31, 2020, to be used only on the second-quarter filing of Form 941 (lines 24 and 25).
In addition, the IRS has indicated that an employer reporting tax credits under the CARES Act or FFCRA will be required to complete Worksheet 1, Credit for Sick and Family Leave Wages, and the Employee Retention Credit. The three-step worksheet enables employers to quantify the refundable and non-refundable components of the credits and guides them through the complex calculations.
The Importance of Understanding Form 941
Given the number of tax forms that employers have to keep up with, it is easy for them to make mistakes. However, Form 941 is a key form that cannot be overlooked. To avoid huge, costly mistakes with the IRS, employers have to understand when to use this form, what information to include, who is exempt from using it, and more. In addition to this, it is critical that they keep a close eye on the latest developments and legislation affecting their payroll taxes, especially tax-saving and tax-deferral mechanisms recently introduced in response to the COVID-19 pandemic.
Making updates to Form 941 is necessary for any business reporting refundable and non-refundable tax credits received under the FFCRA and the CARES Act, or any payroll taxes deferred in anticipation of that tax relief. Even though the relief legislation is beneficial to businesses, updates to form 941 present payroll tax professionals with new compliance challenges, and potential penalties for errors. However, outsourcing tax management helps employers to file their return accurately, follow the latest legislation updates, and stay IRS compliant. As a result, they minimize tax and payment compliance risks, possibly reduce taxes and other expenses, and efficiently handle all aspects of tax filing and remittance process.