Revised Form 941: Employee Retention Credit
Now is an especially important time to review wages paid during the first and second quarters of 2020 to ensure all available employee retention credits and credits for mandated paid sick and Family and Medical Leave Act (“FMLA”) leave are claimed.
Under the Families First Coronavirus Response Act (“FFCRA”), small employers required to pay sick or FMLA wages to those affected by COVID-19 are eligible for a tax credit equal to 100 percent of the wages, allocable group health insurance costs and Medicare taxes paid. Under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, employers eligible for an employee retention credit can claim a credit of 50 percent of certain wages paid to employees and allocable group health insurance costs. To avoid the need for an amended Form 941, it is a good idea to review wages paid and be sure all credits are properly claimed.
Credits for eligible first and second quarter wages can be claimed by retaining employment taxes that would otherwise be deposited each payroll period. Reducing payroll tax deposits is the most efficient way to receive the credits. If total credits exceed the employment tax deposited, a Form 7200 can be filed to claim advance payment of credits. The third way to claim the credit is to request a refund of overpaid tax with Form 941 filed at the end of the quarter.
Employers Can Use the Payroll Tax Deferral
Eligible employers, including governments, can defer their employer portion of Social Security (6.2 percent of wages up to $137,700 for 2020) for wages paid on or after March 27, 2020, and before January 1, 2021. Fifty percent of this deferred tax will be due December 31, 2021, with the remainder due December 31, 2022.
In general, if an employer did not take advantage of deferral during the payroll period, taxes cannot be deferred after they have been deposited. However, it may not be too late to claim deferral for the second quarter. In processing, taxes deposited electronically are identified by category, but this identification is not used by the IRS for comparing liabilities reported with the total deposits made. This leaves an opportunity for employers to defer tax payments if there is a balance due with the second quarter Form 941. Employers can reduce the balance due for eligible employer tax amounts that can be deferred as of the filing of the Form 941.
Even if there is no balance due with Form 941, it’s still not too late. Employers who have paid all their tax deposits for the second quarter without deferring the employer share of Social Security taxes will want to begin this deferral now for the third quarter. In doing so, an employer can defer the tax for a July payroll that has already been deposited by offsetting other taxes to be deposited later in the third quarter.
The Revised Form
Form 941 is a quarterly payroll tax return requiring transactions to be reported in the quarter in which they occurred. The revised Form 941 for the second quarter of 2020 will report eligible wages for the first and second quarter, credits claimed for employee retention or mandated paid leave, payroll tax deferrals, and any advance payments back to employers. The analysis of wages and credits is recorded on a new worksheet 1, included as part of the revised Form 941 instructions.
Employers will need to maintain detailed records of the wages paid supporting the credits claimed. In the case of the FFCRA credits, documentation will include statements by employees giving the reason for the mandated paid leave wages, with written support for the reason, and a statement regarding the inability to work or telework for such reasons. Depending on the reason for the payment of the mandated wages, this could include:
- The governmental authority ordering quarantine;
- The health care professional advising self-quarantine;
- The name and relation of a person in the employee’s household cared for by the employee;
- In the case of an employee caring for a child whose school or daycare is closed, a representation that no other person is providing care for the child during the closure period; and
- In the case of an employee caring for a child older than 14, a statement that special circumstances exist requiring the employee to provide such care during daylight hours.
For the employee retention credit, the employer will need to retain documentation of the governmental order resulting in a complete or partial suspension of the business, or calculations demonstrating the significant decline in gross receipts, and the wages paid to employees during the periods of suspension or decline in gross receipts.
Generally, as an employer, you are responsible for employment tax filings for your business even if that filing is outsourced to a payroll tax provider. If a Certified Professional Employer Organization (“CPEO”) pays wages or other compensation to an individual performing services for you and the services are covered under a contract meeting certain Internal Revenue Code requirements, then the CPEO is treated as the employer for the wages they pay to your employees. Ensure that your payroll tax provider, including a CPEO, claims the maximum appropriate tax credits for you. These credits can add significant cash flow to your business.
Steps to Take
We encourage you to give special attention and careful review to Form 941 to maximize credits to which you are entitled and maintain sufficient supporting documentation for the credits claimed.