How to Amend Form 941 for the Employee Retention Credit

how to amend form 941 for employee retention credit
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Filing Form 941 is a routine task for businesses to report quarterly payroll tax information to the IRS. This includes income, Social Security, and Medicare tax withheld from employees’ paychecks as well as information about how many employees the business has.

Sometimes you may make a mistake on your initial Form 941 that you need to correct. You’ll then use Form 941-X to amend the original filing. This amendment form can also be used to claim credits retroactively if you are eligible but failed to claim it for the applicable quarter.

You may still qualify for the Employee Retention Credit (ERC), which has been around since the start of the pandemic. This form of relief has ended, but you can still claim it for 2020 and 2021 if you qualify. 

This guide covers everything you need to know about the credit and how to amend Form 941 for the employee retention credit.

How Does the Employee Retention Credit Work?

The ERC was created at the beginning of the pandemic in March 2020. It was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed to help Americans get through all the pandemic restrictions and uncertainty. The CARES Act also created relief programs like the Paycheck Protection Program, which provided loans to struggling businesses.

The ERC was meant to help employers retain their employees, and it’s a significant credit for businesses that qualify. The ERC is 50% of qualified wages, up to $10,000 per employee per year for 2020. The total amount possible for 2020 is $5,000 per employee.

Further legislation continued and expanded the ERC for 2021. The credit increased to 70%, up to $10,000 per employee per quarter. The total possible credit for 2021 is $21,000 per employee or $7,000 per employee per quarter. 

It is fairly easy to qualify for this credit. Organizations must have one or more employees and meet one of these two requirements during the qualifying quarters of 2020 or 2021:

    • The business had to partially or fully close because of a government order, or

    • The business lost at least 50% in gross receipts in 2020 and 20% in 2021 when compared to the same quarter in 2019

For most businesses, this program ended on Sept. 30, 2021, so only the first three quarters of 2021 qualify. However, recovery startup businesses can claim the credit for the final quarter of 2021. 

These businesses must have started operations after Feb. 15, 2020, and make less than $1 million in annual gross receipts. Recovery startup businesses may be able to claim up to $28,000 per employee in 2021.

The ERC is a fully refundable credit that is claimed on your quarterly payroll tax return. However, sometimes you may need to claim the credit retroactively, and you have three years from the date you filed the initial return or two years from the date you paid the tax, whichever is later. Next, we’ll discuss the forms you’ll use to claim the ERC or amend your Form 941.

What Are IRS Forms 941 and 941-X?

Form 941, Employer’s Quarterly Federal Tax Return, is a quarterly tax form employers use to report wages paid to employees and the amount of federal income tax, Social Security tax, and Medicare tax withheld from those wages. Employers are required to file Form 941 with the IRS each quarter of the year.

The information reported on Form 941 includes the total number of employees, the total amount of wages paid during the quarter, and the amount of taxes withheld from those wages. The form also includes calculations for employer contributions to Social Security and Medicare taxes.

Form 941 also allows employers to claim certain tax credits or adjustments. For example, employers can use Form 941 to claim the ERC for retaining employees during periods of economic hardship or the qualified small business payroll tax credit for increasing research activities

It is important for employers to complete and file Form 941 in a timely manner accurately. Failure to do so can result in penalties and interest charges.

Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is what you use to correct errors on your previously filed Form 941, and each line of Form 941-X corresponds to that of Form 941. 

You can use it to adjust the amount of federal income tax, Social Security tax, or Medicare tax reported on a previous Form 941. Some common reasons for filing Form 941-X include the following: 

Correcting Employee Wage and Tax Information Errors

Form 941-X can be used to correct errors you made to the wages, tips, and other compensation you reported for your employees. This may include taxable Social Security wages, sick leave wages, Medicare wages, tax information, and other details.

Adjusting for Unreported Tips or Fringe Benefits

You may have to adjust the tips or fringe benefits you initially reported on Form 941 or add information you didn’t include the first time. All of these details need to be included for accurate payroll taxes.

Reconciling Overpayments or Underpayments of Taxes

You may have been notified by the IRS or realized you over or underpaid your taxes for a previous quarter. You can use Form 941-X to correct this mistake.

Claiming Refunds or Abatements

Another common reason to use Form 941-X is to claim refunds or abatements you qualify for but didn’t claim on your initial Form 941, including the ERC. 

You will need to provide a detailed explanation of all the corrections you’re making with Form 941-X. Also, ensure you are using the correct version of the form for the year in which you are making the change.

Note that filing Form 941-X does not relieve you of your obligation to pay any additional taxes due to the correction. You may also be subject to penalties and interest charges if you fail to file or pay any additional taxes owed timely.

Eight Tips on How to Amend Form 941 for Employee Retention Credit

There is almost always a way to remedy a tax mistake, especially if you catch it early. Claiming the ERC retroactively is as simple as submitting an amendment to Form 941, stipulating your credit amount, providing an explanation, and giving a few other details. Here are a few practice-based tips to amend Form 941 to claim the ERC:

1. Gather Your Original Form 941 Documents

Having your original Form 941 for reference is helpful when you’re amending it. You will need to cross-check certain information when completing Form 941-X, so have your tax returns nearby when you get started.

2. Find the Most Recent Version of Form 941-X

Always make sure you have the most recent tax form before getting started. The latest date of revision will be at the top of the form. This ensures you don’t have to deal with any issues or unnecessary back and forth with the IRS related to the form.

3. Use Multiple Forms if Amending Multiple Quarters

You can’t submit one Form 941-X for multiple payroll tax returns you’re amending. You will need a separate Form 941-X for each one. Keep track of which quarters you qualify for in 2020 and 2021, and submit a new form accordingly.

4. Make Sure You Qualify

You must meet the IRS’s qualification requirements for the ERC to claim it on Form 941-X. This means you either had to close because of a government order or saw a loss in gross receipts. 

In addition, if you are a large employer with 500 employees or more, you can only claim the ERC for employee wages you paid when they were not providing services. The definition of a large employer changed from 100 to 500 employees in 2021.

5. Calculate Wages Correctly

You will need to include your calculations for qualified employee wages on Form 941-X. This includes certain health plan expenses during qualifying periods. 

You will take 50% of qualified wages, up to $10,000 per employee per year, for 2020 and 70% of up to $10,000 per employee per quarter for 2021. You will need to provide this corrected amount, the amount you originally reported, and the difference of the two, if applicable. This equals the tax correction you’re reporting.

6. Confirm Accuracy to Avoid Delays

Double-check your math and details on the form before you submit it. You want to avoid any additional delays in getting your credit and any penalties or fees associated with providing inaccurate information that could arise.

7. Determine if You’re a Recovery Startup Business

Recovery startup businesses can qualify for an additional quarter in 2021, and that means an additional $7,000 per employee. Businesses in this category need to have started after Feb. 15, 2020 and have less than $1 million in annual gross receipts. There is a box on Form 941-X that you’ll check if you are a recovery startup business (line 31b).

8. Write a Detailed Explanation

The IRS requires you to explain the details of what you’re amending. This happens on line 43, and you’ll have to describe each of your corrections and the grounds and facts that led to your conclusions. 

Be sure to know and explain the events that caused the underreported or overreported amounts. Failing to provide clear or reasonable explanations could lead to further delays and requests for additional information. You can write your response in paragraph form, but it needs to include:

    • The line numbers on Form 941-X where you entered new information

    • The date you discovered your error

    • The amount of the error

    • The cause of the error

Claiming the ERC is fairly simple when you follow these tips and pay close attention to the instructions on Form 941-X. Working with an ERC professional can help you speed up the process and ensure you’re doing everything correctly.

Contact ERC Today for Help With Form 941 Amendments

The good news is that you still have time to claim the ERC if you qualify. You have the latter of three years from the date you submitted your original Form 941 or two years from when you paid the tax. Make sure to carefully read the instructions for Form 941-X and submit it by the deadline to get your refund. If you already have an amended form 941, and want it checked by a professional, we can help.

Working with a tax credit professional ensures you follow all procedures and correctly calculate your ERC. The team at ERC Today is here to help you through this process. 

We deliver industry-leading speed and accuracy and can help you with general tax consulting and filing questions. We also make it easy for you to start your ERC application online. Contact ERC Today for more information about your Employee Retention Credit options. 

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