Claiming the employee retention tax credit (ERTC) requires you to file Form 941X. This is an amended version of Form 941 (Employer’s Quarterly Federal Tax Return). Form 941X is not just for claiming the ERTC; rather, it is the form you use anytime you need to correct a previously filed 941 form.
This guide explains how to fill out the 941X form. It outlines the Form 941X instructions for businesses that want to claim the ERTC. Here is what you need to know.
Form 941X Instructions to Claim the ERTC
You need to gather copies of the 941 forms you filed and records from your payroll journal. You should also have details about your eligibility for this tax credit. Here’s how to fill out Form 941X after you’ve gathered that information.
1. Fill Out Your Contact Details
The top of Form 941X requires your employer identification number, business name, trade name, and address. You also need to note these details on the top of every page of this form. This ensures your credit gets applied to the correct account, and it helps if the pages of the form are separated during processing.
2. Note the Type of Return and Filing Period
The right side of the form asks for details about the filing period and the form you are correcting. You should almost always choose Form 941. Select Form 944-SS if you’re based in American Soma, Guam, the Commonwealth of the Northern Mariana Islands, or the U.S. Virgin Islands, and file that form. Note also the quarter that you’re applying for the credit and the year.
You also have to write the day you discovered the mistake. You can note the date the return was filed because you’re not correcting a mistake – you’re just filing a claim due to a change in the law.
3. Check the Claim Box
You need to note if you overreported and underreported tax amounts or if you just underreported them – in other words, you should always note if you underreported. This is considered an underreporting of tax because the credit reduces your tax liability. Tick box number 2 in Part 1 – it says “claim” in bold letters.
4. Complete the Certification
Part 2 requires you to certify that you will adjust other tax returns as needed. The ERTC reduces your gross wage cost for the year, which means you need to update the amount you claimed as a wage expense on your income tax return. You may also need to adjust your W3 forms to reflect that you paid a lower amount of payroll taxes.
Tick box 3 at the top of Part 2 to indicate that you understand this responsibility. You should also tick box C under number 5 in this section.
This is for people who ticked the claim box in Part 1. It just says that your claim is only for the employer part of Medicare or social security tax and highlights that you’re not making adjustments to a tax that was paid by withholding funds from your employee’s checks.
5. Enter the Numbers into Part 3
Part 3 of Form 941X requires you to copy all the numbers you entered when you originally filed your Form 941. The original numbers go into column 2.
You should put your corrected numbers in column 1. Column 3 shows the difference between the new and adjusted numbers, and column 4 shows the tax amounts after you multiply by the tax rates for social security and Medicare taxes.
Most of the numbers you enter will be the same in columns 1 and 2. Your original number for wages, for example, should be unchanged from your original return.
The changes come into play on the lines that specifically request details about the Employee Retention Tax Credit. That includes lines 18a, 26a, 30, 31a, and 33a.
6. Note the Amount of the Employee Retention Tax Credit
Note the nonrefundable amount of the employee retention tax credit on line 18a. This line is only for corrections related to quarters beginning after March 31, 2020, and before January 1, 2022. Use line 26a to note the refundable portion of this credit.
You can use Worksheet 2 to calculate the refundable and nonrefundable parts of this credit. Worksheet 2 guides you through the calculations you need to do.
You just need your payroll records and your previously filed 941 forms to complete the worksheet. You can then port the numbers you find onto the relevant lines of the 941X form.
7. Enter the Qualified Wages
Line 30 requests you to enter the qualified wages. The qualified wages vary based on the period for which you are applying for the credit.
You can only claim up to $10,000 in wages per employee for 2020. Say that you amend for the second quarter of 2020 and report $7,000 in qualifying wages for one employee. You can then only claim $3,000 in qualifying wages for that employee for the next quarter, even if you paid them more than $3,000 that quarter.
The limits are much higher when you claim this credit for 2021. You can claim up to $10,000 in qualifying wages per quarter for this year. That means that you can claim all of an employee’s wages as qualifying if they earned less than $10,000 for the quarter, and you can claim up to $10,000 if they earned over that amount for the quarter.
Note that, as you would expect, this is contingent on you meeting the requirements to claim the credit in the first place. You should also note that you don’t write individual employee pay on this line.
You instead note the total of the qualifying wages that you paid to all your employees. That means your number could be much higher than the individual maximums outlined in these examples.
8. List Qualified Healthcare Expenses
You can also claim the employee retention tax credit on qualifying healthcare expenses. This generally includes any healthcare expenses that you paid for your employees. You can combine this amount with wages to reach the limits noted above.
Here is an example. Say that you qualify for the credit for 2020. You paid an employee $8,500 in wages and $1,500 in healthcare expenses.
Those numbers together get you to the $10,000 limit. You can claim both these amounts.
Say, however, that you paid $9,000 in qualifying wages and $1,500 in qualifying healthcare expenses. You can claim the $9,000 in wages, but you can only claim $1,000 in healthcare expenses. This ensures that you stay under the limit.
9. Note If You’re Making a Claim for March 2020
The above sections for qualifying wages and healthcare expenses only applied to wages paid from the second quarter of 2020 to the end of 2021. You should use line 33a if you want to file a Form 941X to claim this tax credit on wages paid between March 13 and March 31, 2020.
You can use this line if it makes sense for your situation. Most businesses, however, are better off filing amended returns for one of the latter quarters of 2020. You can only claim the credit against up to $10,000 in qualifying wages for 2020.
This means you can most likely get up to this threshold by amending the second quarter returns or the second quarter returns along with the third and possibly even the fourth quarter. Filing to claim for the 18 days that this credit was available during the first quarter of 2020 is possible, but it’s usually not effective.
Here is an example by way of explanation: Imagine that you pay an employee $500 per week. They earned just over $1,000 in qualifying wages during the first quarter of 2020. They then earned $6,000 in qualifying wages during the following three quarters of the year.
You can file to report the $1,000 for the first quarter, the $6,000 for the second quarter, and the $3,000 for the third quarter. You can alternatively claim $6,000 in qualified wages for the second quarter and $4,000 in qualifying wages for the fourth quarter. The second option gets you the same tax credit, but it only requires you to file two Form 941X, not three.
Recovery start-up businesses can claim this credit for the third and fourth quarters of 2021 even if they didn’t have a drop in revenue or closure due to COVID-19. You should note in box 31b if you’re a recovery start-up business. You qualify as this type of business if you opened after February 15, 2020, and your annual gross receipts are less than $1 million.
How to Complete Your ERTC Claim
Part 4 of Form 941X is critical. This part of the form doesn’t require complicated numbers of formulas, but it can be the most confusing part of the form for some people. Here is what you need to do to complete this section.
Skip Boxes 41 and 42
Box 41 is for businesses that entered both underreported and overreported amounts. This doesn’t apply to you because you’re only dealing with an underreported tax amount. Box 42 asks if you’re making corrections due to misclassified workers.
This would come into play, for example, if you had retroactively classified a contractor as an employee and you needed to pay additional tax.
Give an Explanation of the Corrections
Box number 43 applies to you, and you must fill out this section carefully. Note that you are making the corrections because you want to claim the Employee Retention Tax Credit. You should then explain why you qualify to claim this credit.
You can claim this credit based on paying employees when your revenue dropped below a certain level or if you continued to pay employees even though your operations were partially or fully suspended due to COVID-19. You qualify for the credit if your revenue during a quarter of 2020 fell to 50% or less than the revenue you collected for the same quarter of 2019. You can continue to claim this credit every quarter until your revenue reaches 80% of what it was for the same quarter of 2019.
The revenue rules for the 2021 tax credit are more relaxed. You can claim the credit if your revenue fell to 80% of what it was for the same quarter of 2019. You can use 2020 numbers if you weren’t open in 2019.
You can also claim the credit if you had a full or partial reduction of services due to COVID-19 in either 2020 or 2021. You need to outline exactly what you qualify for the credit. Be careful with this section, as failure to complete it correctly could delay your credit or even cause the IRS to reject your claim.
Sign the Form 941X
You must sign 941X, or the IRS won’t be able to process it. You should also include your phone numbers. Paid preparers need to note their names, PTINs, EINs, and contact details. They also need to sign this form.
You must submit Form 941X by the deadline so you can get the credit. There is effectively a rolling deadline to claim the credit. The amended form is due within three years of the due date of the originally filed return. You can amend forms after this date, but you can only claim a refund if you file within three years of the original deadline.
Get Help Applying for the ERTC
ERC Today exists to help businesses apply for the employee retention tax credit. This credit can be confusing, even to tax professionals, because it’s new and has complicated rules. You don’t have to apply for this credit on your own, however – we can help you navigate the complexities.
This is a never-before-offered credit, but you have a limited amount of time to apply. Start the process by seeing if you qualify now, or contact us with questions. Use our site to apply for the ERTC.