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

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:

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

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

Part 3 has these new data fields:

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.