Payroll Tax Reporting with Enhanced Form 941

Thoughtware Alert Jun 22, 2020
Pillars on a Government building

The U.S. Department of the Treasury has released a final revision of Form 941 to be used starting with the second quarter of 2020. As of the date of print, the instructions are still in draft mode. This enhanced Form 941 is required with the new laws and related rule and tax reporting changes resulting from various COVID-19 legislation. The revised form indicates nearly 20 new data entry fields (lines) to accommodate additional reporting requirements related to employment tax relief established by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  

As noted in a recent BKD Thoughtware® alert, the additional lines are required for reporting data regarding refundable and nonrefundable portions of the credit for qualified sick leave wages and the credit for qualified family leave wages from the passing of the FFCRA. In addition, new lines were required from the passing of the CARES Act (see Thoughtware articles “Senate Passes CARES Act with Further Tax Relief for Individual & Business Taxpayers” and “Employee Retention Credit Provides Relief for Organizations with No PPP” for the Employee Retention Credit, deferrals of the employer’s share of Social Security tax and advances received through filing Form(s) 7200.  

Draft instructions for Form 941 now include a draft of Worksheet 1, Credit for Qualified Sick and Family Leave Wages and the Employee Retention Credit. The worksheet is used to determine amounts applicable to some of the new lines for the revised Form 941.

For other updates from the IRS in regard to the new Form 941 instructions, view this recent IRS draft.

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

The following significant changes have been made to Form 941 to allow for the reporting of new employment tax credits and other tax relief related to COVID-19. 

  • The new credit for qualified sick and family leave wages is reported on line 11b and, if applicable, line 13c as calculated on Worksheet 1. The employee share of Social Security tax on qualified sick and family leave wages is reported on lines 5a(i) and 5a(ii). Qualified sick and family leave wages aren’t subject to the employer share of Social Security tax. Qualified sick and family leave wages not included on lines 5a(i) and 5a(ii) because the wages reported on that line are limited by the Social Security wage base are included on line 5c. Qualified health plan expenses allocable to qualified sick and family leave wages are reported on lines 19 and 20. 
  • The new Employee Retention Credit is reported on line 11c and, if applicable, line 13d as calculated on Worksheet 1. Qualified wages (excluding qualified health plan expenses) for the Employee Retention Credit are reported on line 21 (these amounts also should be included as wages on lines 5a, 5c and, if applicable, 5d). Qualified health plan expenses allocable to the qualified wages for the Employee Retention Credit are reported on line 22. For the second-quarter Form 941 only, qualified wages for the Employee Retention Credit and qualified health plan expenses allocable to the qualified wages for the period from March 13, 2020, to March 31, 2020, are reported on lines 24 and 25, respectively. 
  • Employers, including government employers, can defer the deposit and payment of the employer share of Social Security tax otherwise due during the calendar quarter. The amount of deferral is reported on line 13b. 
  • Employers that requested an advance of the sick and family leave credit and/or the Employee Retention Credit would have filed a Form 7200, Advance Payment of Employer Credits Due to COVID-19, for the quarter. The amount of all advances received from Forms 7200 filed for the quarter is reported on line 13f. 

Conclusion & Action Plan

As a reminder, the filing deadline for the second-quarter Form 941 is July 31, 2020. Considering the significant legislation, evolving regulations, and the lack of a finalized form, your payroll tax reporting staff or outsourcing company will need to get up to speed and know your company’s facts and circumstances. Clearly, more information will be required for preparing the revised Form 941 this quarter. We recommend you start capturing the information you will need now. Suggestions for your internal team or communications to your payroll provider include:

  • Did the reporting employer:
    • Pay qualified sick or family/medical leave during the period eligible for credit?
    • Receive a Paycheck Protection Program loan?
      • If not, does the reporting employer qualify for the retention credit?
    • Defer any of its share of Social Security tax?
    • Apply for and receive an advance of anticipated credits using Form 7200?  
      • If so, when did the employer receive this advance? 

Please note that this information is current as of the date of publication. If you have questions, please reach out to your BKD Trusted Advisor or use the Contact Us form below.

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