May 4, 2020 IRS releases Form 941 draft instructions including reporting for the Social Security tax deferral and COVID-19 employer tax credits See the attached PDF for updates to this Alert reflecting developments in the areas of the employee retention credit and the deferral of the employer share of Social Security tax. Contents ______________________________________________________________________________ Overview Important note about the CARES Act employee retention credit Form 941 lines that are added or changed for COVID-19 employment tax provisions Reporting the deferral of the employer share of Social Security tax Reporting FFCRA wages and tax credits on draft Form 941 Reporting the CARES Act employee retention credit Accounting for advance payments requested on Form 7200 ______________________________________________________________________________ For more information about the FFCRA and CARES Act employer provisions, download our special report. Overview As previously reported, the IRS issued a draft of the Form 941, Employer's QUARTERLY Federal Tax Return, that will go into effect starting with the 2020 second quarter. The draft includes fields for reporting the COVID-19 federal employment tax provisions including the Social Security tax deferral, the employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and the paid leave credits under the Families First Coronavirus Response Act (FFCRA). Now the IRS has issued the draft Form 941 instructions that include new Worksheet 1 for figuring the tax credits for the CARES Act employee retention credit and/or the FFCRA paid leave credits. It is necessary to complete Worksheet 1 before preparing the Form 941. Worksheet 1 is retained in the employer's records and is not filed with the IRS; however, the IRS is likely to require it in the case of an audit. (See draft Form 941 instructions, pg. 12.) The draft Form 941 contains the details necessary for employers and the IRS to confirm that the special employment tax provisions available for COVID-19 are properly applied and accurate compared to the total Social Security wages, number of employees, and the COVID-19 details that are reported on Forms 941. Important note about the CARES Act employee retention credit The draft Form 941 instructions indicate that the CARES Act employee retention credit cannot be claimed in the 2020 first quarter; accordingly, if employers claimed this credit for the 2020 first quarter, a Form 941-X is likely necessary for the 2020 second quarter. Any CARES Act employee retention credit applicable to the period March 13 through March 31, 2020, can only be claimed on the 2020 second quarter Form 941 and no amount can be entered for this period on the 2020 third- or fourth-quarter Form 941. Employers that missed reporting the employee retention credit for this period on the 2020 second-quarter Form 941 will presumably need to apply for an advance payment using Form 7200, Advance Payment of Employer Credits Due to COVID-19, though this is not stated in the draft Form 941 instructions. Form 941 lines that are added or changed for COVID-19 employment tax provisions The draft Form 941 shows that the following lines will be added or changed for purposes of the new COVID-19 federal employment tax provisions. Line 5a(i): Qualified sick leave wages Line 5a(ii): Qualified family leave wages Line 11b: Nonrefundable portion of credit for qualified sick and family leave wages from Worksheet 1 Line 11c: Nonrefundable portion of employee retention credit from Worksheet 1 Line 13a: Total deposits for the quarter, including overpayment applied from the prior quarter and overpayment applied from Form 941-X, 941-X(PR), 944-X, or 944-X(SP) filed in the current quarter Line 13b: Deferred amount of the employer share of Social Security tax Line 13c: Refundable portion of credit for qualified sick and family leave from Worksheet 1 Line 13d: Refundable portion of the employee retention credit from Worksheet 1 Line 13e: Total deposits, deferrals, and refund credits. (Add lines 13a, 13b, 13c, and 13d) Line 13f: Total advances received from filing Form(s) 7200 for the quarter Line 13g: Total deposits, deferrals, and refundable credits less advances. (Subtract line 13f from line 13e) Line 19: Qualified health expenses allocable to qualified sick leave wages Line 20: Qualified health plan expenses allocable to qualified family leave wages Line 21: Qualified wages for the employee retention credit Line 22: Qualified health plan allocable to wages reported on line 21 Line 23: Credit from Form 5884-C, line 11, for this quarter Line 24: Qualified wages paid March 13 through March 31, 2020, for the employee retention credit (use this line only for the second-quarter filing of Form 941) Line 25: Qualified health plan expenses allocable to wages reported on line 24 (use this line only for the second-quarter filing of Form 941) Reporting the deferral of the employer share of Social Security tax The CARES Act allows employers to defer the deposit and payment of the employer share of Social Security tax for deposits due on or after March 27, 2020, and before January 1, 2021, with 50% of the deferral required to be repaid by December 31, 2021, and the remainder by December 31, 2022. All employers and self-employed individuals may avail themselves of this CARES Act provision, except that this option is no longer available once a lender notifies an employer that a loan provided under the Paycheck Protection Program (PPP) is forgiven. Line 13b: Deferred amount of the employer share of Social Security tax Enter on line 13b the amount of the employer share of Social Security tax that is being deferred for the quarter. The employer share of Social Security tax is 50% of column 2 of line 5a plus 50% of column 2 of line 5b. Don't include the employee Social Security taxes reported on lines 5a(i) and 5a(ii) and don't reduce the amount reported on line 13b by any credits claimed on line 11a, 11b, or 11c. The employer cannot defer Social Security tax that it already paid; accordingly, the maximum amount that can be deferred each quarter is the employer share of Social Security tax less any excess of total deposits (line 13a) over the difference between total taxes after adjustments (line 10) and the employer share of Social Security tax (50% of column 2, line 5a and line 5b). Reporting FFCRA wages and tax credits on draft Form 941 Line 5a: Taxable Social Security wages Do not include on line 5a wages that are reported on line 5a(i) or line 5a(ii). The total reported on lines 5a, 5a(i), 5a(ii) and 5(b) should not exceed the 2020 Social Security wage limit of $137,700. Line 5c: Taxable Medicare wages & tips FFRCA qualified sick and family leave wages are subject to Medicare tax. The refundable credit available for the Medicare tax allocable to qualified FFCRA wages is reported on line 13c. Line 5a(i): Qualified sick leave wages In Column 1, show the total qualified sick wages paid under the FFCRA. These wages are not subject to the employer portion of Social Security tax. Accordingly, in Column 2, show only 6.2% of the amount in Column 1. The refundable credit for qualified sick wages is reported on line 13c and qualified health plan expenses for these employees are reported on line 19. Line 5a(ii): Qualified family leave wages In Column 1, show the total of qualified family leave wages paid under the FFCRA. These wages are not subject to the employer portion of Social Security tax. Accordingly, in Column 2, show only 6.2% of the amount in Column 1. The refundable credit for qualified family leave wages is reported on line 13c and qualified health plan expenses for these employees are reported on line 20. Line 11b: Nonrefundable portion of credit for qualified sick and family leave wages from Worksheet 1 Enter here the portion of the tax credit for the FFCRA qualified sick and family leave wages that is not refundable because the credits taken on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, exceeds the FFCRA credit available. This amount is reflected on Worksheet 1, Step 2, line 2j of the Form 941 instructions. Any FFCRA tax credit in excess of those claimed on Form 8974 and Form 5884-C represents the refundable portion that is reported on line 13c. Line 13c: Refundable portion of credit for qualified sick and family leave from Worksheet 1 Businesses and tax-exempt organizations with fewer than 500 employees that are required to provide paid sick leave and family leave under the FFCRA are eligible to claim the FFCRA tax credit. The credit for qualified sick and family leave wages consists of the qualified sick leave wages, the qualified family leave wages, the employer share of Medicare Tax (at 1.45%) allocable to those wages and the qualified health plan expenses for these qualified employees. Qualified health plan expenses incurred in connection with FFCRA qualified wages are required to be reported on line 19 (for qualified sick leave wages) and line 20 (for qualified family leave wages). Enter the refundable portion of the credit for qualified sick and family leave wages from Worksheet 1, Step 2, line 2k. The refundable portion of the credit is allowed after the employer share of Social Security tax reported on Form 941, lines 5a and 5b, is reduced to zero by nonrefundable credits. Line 19: Qualified health expenses allocable to qualified sick leave wages A qualified health expense is defined as the cost the employer incurred to maintain health insurance coverage for an employee during the period it provided paid sick leave pursuant to the FFCRA. Report on line 19 the amount shown on Worksheet 1, Step 2, line 2b. Line 20: Qualified health plan expenses allocable to qualified family leave wages A qualified health expense is defined as the cost the employer incurred to maintain health insurance coverage for an employee during the period it provided paid family leave pursuant to the FFCRA. Report on line 20 the amount shown on Worksheet 1, Step 2, line 2f. Reporting the CARES Act employee retention credit An employer cannot claim the CARES Act employee retention credit if the employer receives a Small Business Interruption Loan under the PPP. In addition, for purposes of the CARES Act employee retention credit, an employer may not take into account the following:
For the 2020 second quarter only, the credit includes 50% of the qualified wages paid between March 13, 2020, and March 31, 2020 (see lines 24 and 25). That is because the CARES Act employee retention credit cannot be claimed in the 2020 first quarter. Any CARES Act employee retention credit applicable to the period March 13 through March 31, 2020, can only be claimed on the 2020 second-quarter Form 941 (lines 24 and 25) and no amount can be entered for this period on the 2020 third- or fourth-quarter Form 941. Employers that missed reporting the employee retention credit for this period on the 2020 second-quarter Form 941 will presumably need to apply for an advance payment using Form 7200, Advance Payment of Employer Credits Due to COVID-19, though this is not yet stated in the draft Form 941 instructions. Line 5a: Taxable Social Security wages Do not reduce the wages reported on line 5a for any portion of the CARES Act employee retention credit. Line 5c: Taxable Medicare wages & tips Do not reduce the wages reported on line 5c for any portion of the CARES Act retention credit. Note also that there is no refundable credit for the Medicare tax allocable to qualified wages paid in connection with the CARES Act employee retention credit. Line 11c: Nonrefundable portion of employee retention credit from Worksheet 1 Enter here the portion of the tax credit for the CARES Act employee retention credit that is not refundable because the credits taken on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans and the FFCRA paid leave credits exceed the CARES Act employee retention credit available. This amount is reflected on Worksheet 1, Step 2, line 3j of the Form 941 instructions. The nonrefundable portion of the credit is limited to the employer share of Social Security tax reported on Form 941, lines 5a and 5b, after that share is first reduced by any credits claimed on Form 8974, Form 5884-C, and/or for the nonrefundable portion of the credit for FFCRA qualified sick and family leave wages. Any credit in excess of the remaining amount of the employer share of Social Security tax is refundable and reported on Form 941, line 13d. Line 21: Qualified wages for the employee retention credit Enter here the qualified wages on which the CARES Act employee retention credit is being claimed. Do not include the qualified health plan expenses allocable to these wages, instead, report them on Line 22. Exclude from line 21 qualified wages for the CARES ACT employee retention credit incurred for the period March 13 through March 31, 2020. Instead, report the amount for this period on line 24. Report on line 21 the amount shown on Worksheet 1, Step 3, line 3a. Line 22: Qualified health plan allocable to wages reported on line 21 A qualified health expense is defined as the cost the employer incurred to maintain health insurance coverage for an employee during the period in which the qualified wages from line 21 were paid. Note that qualified health insurance coverage claimed for an employee who is included in the amount reported on line 20 (FFCRA qualified health expenses) cannot also be reported here. Exclude from line 22 qualified health plan expenses incurred for the period March 13 through March 31, 2020. Instead, report the amount for this period on line 25. Report on line 22 the amount shown on Worksheet 1, Step 3, line 3b. Line 24: Qualified wages paid March 13 through March 31, 2020, for the employee retention credit (use this line only for the second-quarter filing of Form 941 Line 24 can only be completed in the 2020 second quarter. No entry is allowed on this line for the 2020 third and fourth quarter. Report on line 24 the amount shown on Worksheet 1, Step 3, line 3c. Line 25: Qualified health plan expenses allocable to wages reported on line 24 (use this line only for the second-quarter filing of Form 941 Line 25 can only be completed in the 2020 second quarter. No entry is allowed on this line for the 2020 third and fourth quarter. Report on line 25 the amount shown on Worksheet 1, Step 3, line 3d. Accounting for advance payments requested on Form 7200 Employers are eligible to file Form 7200 for the quarter if they paid FFCRA qualified sick and/or family leave wages or qualified wages eligible for the CARES Act employee retention credit, and the amount of employment tax deposits they retained wasn't sufficient to cover the cost of these credits. The employer can file Form 7200 for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which it paid the qualified wages. If necessary, the employer can file Form 7200 several times during each quarter. Employers are instructed that they should not file Form 7200 after they file Form 941 for the fourth quarter of 2020, or the annual Forms 943, 944, or CT-1 for 2020. Additionally, employers should not file Form 7200 to request advance credits for any anticipated credit for which they already reduced their federal employment tax deposits. Line 13f: Total advances received from filing Form(s) 7200 for the quarter Report on line 13f the total advances received from filing Form 7200; however, if the employer filed a Form 7200 before the end of the quarter but did not receive the advance before filing Form 941, that amount is not included on line 13f. ———————————————
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