Filing for the ERTC: All About IRS Form 941

IRS Form 941
Table of Contents

Key Takeaways:

      • The employee retention credit (ERTC) is a fully refundable credit introduced in the CARES Act to help employers retain workers

      • Businesses with employees that experienced either a partial or full shutdown because of a government order or a significant loss in gross receipts may be eligible for the ERTC

      • Use Form 941 to claim the credit or Form 941-X to claim it retroactively

      • 9 steps to file for the ERTC:

        1. Find the right form

        1. Use worksheet 1

        1. Complete step 1

        1. Complete step 2

        1. Complete step 3

        1. Find lines 11c and 13d on Form 941

        1. File IRS Form 941

        1. Claim the credit retroactively

        1. Use Form 941-X

          • Remember to keep records in case of an audit and file an ERTC amendment within three years of your original tax return

        Many employers have struggled significantly during the pandemic, with a record number of business closures and layoffs. The unemployment rate skyrocketed in 2020 and 2021, and hundreds of thousands of businesses had to close around the country, some permanently. Certain tax breaks and other federal assistance have helped many people stay afloat through it all.

        The employee retention credit (ERTC or ERC) was included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020. The government passed this legislation to help individuals and businesses during the economic uncertainty of the early pandemic stages. The ERTC was introduced to help employers retain workers with a significant tax break on qualifying wages.

        Employers can still take advantage of this credit, even though the applicable period has technically ended. Here is your comprehensive guide to the ERTC, how to use IRS Form 941, and how employers can file.

        What’s the Purpose of the ERTC?

        Employers can use the ERTC to set off wages they pay to employees. It’s a fully refundable tax credit initially rolled out on March 13, 2020, with the CARES Act and was extended by the American Rescue Plan Act of 2021. 

        The program ended on September 30, 2021, unless your business is considered a recovery startup. These businesses can take the credit for wages through the end of 2021.

        The ERTC is 50% of qualifying wages for 2020 and 70% for 2021. The two years also have different limits: 

            • 2020: $10,000 per employee for all quarters

            • 2021: $10,000 per employee per quarter ($21,000 annually per worker)

          Employers can claim the ERTC using IRS Form 941, Employer’s Quarterly Federal Tax Return, which is also where they report their taxes for income, Social Security, and Medicare. 

          However, the credit has ended, and to claim it retroactively, you’ll use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This document amends the originally submitted Form 941. Instructions on how to use this form are included in a later section.

          Who Is Eligible for the ERTC?

          Not all employers are eligible for the ERTC, though most probably have some periods that apply. The legislation outlined specific guidelines related to business closures and gross receipts to help businesses determine whether they qualify. Here’s what you need to know:

          Employee Count

          A business must have had at least one employee in 2020 or 2021 to qualify. You must also have had 500 or fewer full-time W-2 employees in the quarter you’re claiming the credit for in 2021. 

          The definition of a large employer was changed to businesses with more than 500 full-time employees in 2021 from more than 100 full-time employees in 2020.

          Business Operation Date

          Your business must have started operations before February 16, 2020 in order to be eligible for the Employee Retention Credit.

          Shutdowns and Losses in Gross Receipts

          You must also meet one or both of these requirements: 

              • Your business must have shut down because of a government order, whether fully or partially suspending operations, or

              • For 2020: You calculated at least 50% in lost gross receipts during a qualifying quarter compared to the same period in 2019

              • For 2021: You calculated at least 20% in lost gross receipts during a qualifying quarter compared to the same period in 2019

            Qualifying Quarters

            In 2020, quarters two through four qualify. The second quarter began on March 13, 2020, when the legislation was passed. In 2021, quarters one through three qualify, and quarter four only applies to recovery startup businesses.

            Recovery Startup Businesses

            You can claim the credit for that last quarter of 2021 if you qualify as a recovery startup business. These businesses must have begun operations after February 15, 2020, and have gross receipts of less than $1 million.

            The ERTC can be a major break for employers – for 2020, there is a potential $5,000 credit per employee per year, and for 2021, there is a possible $21,000 per employee per year.

            Recovery startup businesses may be able to claim up to $28,000 per employee per year for 2021. Contact an ERTC expert if you have questions about your eligibility.

            9 Steps to Apply for the ERTC with IRS Form 941

            Determining whether you qualify is the first step in applying for the ERTC. You then need to compile all the information you’ll need to submit IRS Form 941 with your calculations. Here’s everything you need to do to file Form 941 or Form 941-X:

            1. Find the Right Form

            Make sure you locate IRS Form 941, Employer’s Quarterly Federal Tax Return, where you typically report your income tax, Social Security tax, and Medicare that you withhold from employees wages.

            2. Use Worksheet 1 For 941

            Locate the IRS’s instructions for Form 941, and go to the last page, which is Worksheet 1. This is where you’ll calculate your ERTC and the credit for qualified sick and family leave wages. You must complete all three steps if you qualify for both credits, but you just need to complete steps 1 and 3 if you only qualify for the ERTC.

            3. Complete Step 1

            Step 1 in Worksheet 1 is where you report Social Security tax. Complete that section first. 

            4. Complete Step 2

            Only complete step 2 of the worksheet if you are claiming the sick and family leave credits. Move on to step 3 if it doesn’t apply.

            5. Complete Step 3

            Head to step 3. You will list qualified wages and qualified health plan expenses, then add them together. Your retention credit, recorded on line 3c of the worksheet, is the sum of those two numbers multiplied by 70% (0.70). 

            Now, enter the employer share of Social Security tax from step 1 (line 1l) on line 3e of the worksheet. If you completed step 2 and have qualified sick and family leave wages, record them on line 3f. Subtract line 3f from line 3e and enter the result on line 3g. The non-refundable portion of employee tax credit is the smaller of line 3d (the retention credit) or line 3g. 

            Then, subtract the above result (line 3h) from the retention credit (3d), which is your refundable portion of the ERTC. 

            6. Find Lines 11c and 13d on Form 941

            You will include the number you calculate for step 3, line 3h (nonrefundable portion) on line 11c on Form 941. Then, insert what you get for the last number, line 3i (refundable portion), on line 13d on Form 941.

            7. File IRS Form 941

            Make sure everything is in order on your IRS Form 941, and file it with the IRS. Note that you do not need to include any backup documentation or proof to show the IRS how you calculated the ERTC.

            8. Claim the Credit Retroactively

            Take the above steps when claiming the ERTC with your standard tax return. There are many cases, however, for which you’ll need to claim the credit retroactively. You can do so using Form 941-X. 

            9. Use Form 941-X

            Claiming the ERTC retroactively requires you to submit Form 941-X, an amendment to an employer’s quarterly tax return or claim for a refund. Enter your business information at the top, and check part 1, box 2 for “Claim.” 

            Then, check part 2, box 5d: “The claim is for federal income tax, social security tax, Medicare tax, or Additional Medicare Tax that I didn’t withhold from employee wages.” Complete part 3 using your calculations from Worksheet 1 that you used to determine the nonrefundable and refundable portions of the credit.

            Filing for the ERTC shouldn’t be too tricky, especially if you’ve kept meticulous, accurate records throughout the year. Make sure you discuss your situation with an ERTC expert, so you never miss out on a tax break or requirement.

            ERTC Filing Tips for Employers

            Now you know how to use Form 941 and Form 941-X. The process is pretty simple when it comes to calculating your credit and filing with the IRS. But you may still have questions or concerns about the rest of the ERTC process. Here are some additional tips to help guide you:

                • Keep records in case of an audit: You don’t have to provide proof of your calculations with your Form 941 filing, but it’s important to keep all your records in case you’re audited in the future. You may have to show the IRS how you got your numbers.

                • Claim the credit before it’s too late: You have three years from the date you initially filed your tax return to claim the ERTC on Form 941-X retroactively. 

                • Apply even if you weren’t in business in 2019: The standard calculations require that you compare your gross receipts to the same period in 2019. However, if you weren’t in operation at that time, you can use the same period in 2020 to calculate your loss in gross receipts. 

                • Read through the IRS instructions: Many people think IRS documentation is confusing, so they avoid reading guidelines. However, the step-by-step instructions the IRS provides for tax forms like Form 941 are beneficial in determining what you need to do and how to do it.

                • Claim the ERTC even if you got a PPP loan: Initially, businesses with a Paycheck Protection Program (PPP) loan couldn’t claim the ERTC. Now, they can, but they can’t claim the same wages for the ERTC that were part of their PPP loan forgiveness.

                • Don’t include the credit in gross income: The IRS states that employers receiving the ERTC for qualified wages don’t have to include the credit in their gross income for federal tax purposes.

                • Be patient: It takes varying amounts of time for the IRS to send the credits to qualifying employers. Prepare to wait at least a few weeks. 

                • Work with an ERTC or tax professional: Figuring out your credit amount and how to claim it can be confusing for employers. Talk to an expert who can assist you in the process and ensure you’re in compliance.

              Don’t miss your chance to claim the ERTC and get a major tax break from the IRS. Carefully review qualification requirements to determine which quarters you qualify for and the limits on employee wages. 

              Download The Most Up-to-Date 941 and 941X Forms:

              Contact the ERTC Experts at ERC Today

              Trying to navigate tax legislation and changes in terms can be complicated and confusing. You may believe you qualify for the ERTC, but you’re not sure how to claim the credit or what all the IRS tax jargon means. 

              It’s not always easy to follow what new laws mean for your taxes or your business. Sometimes you simply need to turn to the experts. 

              If you need to see a 941-X ERC example of a properly filled-out worksheet, or need help with filling any of your 941 forms out, reach out and we can help guide you.

              ERC Today helps employers like you understand the employee retention credit, the most significant government stimulus program ever, and whether they qualify. 

              We help qualifying businesses complete and submit IRS Form 941 or Form 941-X properly and by the deadline. We’ll also help you figure out how to manage the ERTC with PPP loan participation. 

              Contact ERC Today for more information about your employee retention credit options.

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