Looking back at the last two years and the sprinter’s pace at which COVID-19 payroll tax credit relief was enacted, payroll accountants have earned a well-deserved pat on the back! While the rules were often complex and the substantiation requirements thorough, COVID-19 credits were well worth claiming and significantly helped companies stay financially afloat. But as the dust settles on those prior 2020–2021 Form 941 payroll tax returns, undoubtedly credits were missed, and mistakes were made. Rest assured, no finger-pointing here. The most well-funded payroll tax departments could hardly keep up with the changes in the law let alone the changes made to the payroll tax form itself (we counted no less than 6 changes to Form 941 in the last two years). It’s time to advise clients to take a second look and develop real solutions to those COVID-19 credit errors and miscalculations. File an amended 941-X payroll tax return to fix underpayments and make a credit refund claim for overpayments before it’s too late.
Form 941-X has new line items specifically designated for COVID-19-related corrections.
Employers who underreported payroll tax should correct errors in the period they are discovered and pay the amount due when they file an amended Form 941-X for an interest-free adjustment (see Treas. Reg. Sec. 31.6205-1(b)(2)(i) for reference). Generally, an interest-free adjustment is available if an error is ascertained, corrected, and paid within the statute of limitations (SOL) period and by the due date for filing the next payroll tax return for the quarter in which the error is ascertained. Otherwise, interest will begin to accrue on underpayments from the date Form 941-X is filed until the payment is received by IRS (see IRC Sec. 6601 for reference). But for employers who found they may have left credits unclaimed, perhaps due to missed benefit allocations relating to qualified sick or family leave or the employee retention tax credit (ERC), the time to amend has a definite expiration date.
The SOL period for filing a refund claim on Form 941-X is the later of three (3) years from the date the employer filed its original return, or two (2) years from the date the tax was paid. (see IRC Sec. 6511 for reference). When employers file amended returns for the employer’s portion of overreported tax, there are two methods they can use to correct or recover the overpayment. Under the adjustment process, an employer can claim the credit against regular payroll tax due on its next Form 941 filing and then file the required Form 941-X to report the correction (see Form 941-X Instructions, (7/2021, pg. 7) for reference). Or, the employer can use the claim process to request a refund of the employer’s share of overreported amounts directly on Form 941-X. If an employer has both overreported and underreported amounts, it may use the overreported amount to adjust and net against the underreported amount (see Form 941-X Instructions, Part 4 item #41 for reference). Employers must use the claim process to request a refund of an overpayment if it is within 90 days of an expiring SOL (see Form 941-X Instructions, (7/2021) for reference). Employers should create a timeline to track when the SOL to file an amended return expires for each payroll return that previously missed claiming eligible COVID-19 credits.
An employer’s deadline to file a claim for refund under IRC Sec. 6511 does not coincide with the IRS’s ability to audit or make a tax assessment for errors found on a payroll tax return under IRC Sec. 6501 (see IRC Sec. 6511; IRC Sec. 6501 for reference). IRS’s ability to audit and collect tax on a payroll tax return is also limited by statute to three (3) years from the date the return was filed (see IRC Sec. 6501(a) for reference). And, for assessment and collection purposes, a payroll tax return for any period ending with or within a calendar year is considered filed by April 15th of that following calendar year (see IRC Sec. 6501(b)(2) for reference). However, the IRS’s collection statute expiration date was extended to five (5) years for credits attributable to the paid sick and family leave credit and the ERC beginning April 1, 2021 (see IRC Secs. 3131(f)(6), 3132(f)(6) and 3134(l) for reference). A forewarning: the extension of time IRS has to collect tax did not extend the time an employer can submit a claim for refund or file an amended 941-X for those same credits.
Checkpoint Edge has detailed guidance on amending payroll tax returns:
- FTC Par. S-5526 Correcting underpayments of employment taxes.
- Key Issue 20H Correcting errors made on form 941.
- 4275 Adjustments for under-collected or over-collected taxes.
- Key Issue 20I Information that must be reported on Form 941-X.
- FTC Par. T-7501 Time limitations for filing refund claims.
- FTC Par. T-4010 Employment and withholding taxes – IRS assessment period.
Qualified Sick and Family Leave
Beginning April 1, 2020, eligible employers could claim a credit for qualified sick and family leave wages for leave taken after March 31, 2020, and before September 30, 2021 (see IRS Notice 2020-21, 2020-16 IRB covering IRC Sec. 3111; 3221 (3/27/2020); Families First Coronavirus Response Act (FFCRA) (P.L. 116-127) (3/18/2020) amended and extended by the American Rescue Plan Act (P.L. 117-2; 3/11/2021) for reference). Credits for qualified sick leave meant an eligible employer could reduce its payroll tax by the amount of sick time paid to employees who were unable to work (or telework) because they were subject to a government isolation order, advised to self-quarantine by a health care provider or if they were experiencing symptoms of COVID-19 and seeking medical diagnosis (see IRC Sec. 5102(a); IRC Sec. 3132(c) for reference). After March 31, 2021, qualified sick leave expanded to include leave for things like obtaining a COVID-19 vaccine or caring for a child whose school had closed due to COVID-19 precautions. For quarterly filers, this meant the first payroll tax return claiming COVID-19 relief would’ve been due July 31, 2020, assuming it was timely filed and paid. This means the time to file a corresponding amended 941-X for the first missed paid sick or family leave credits would be three (3) years from this date, or July 31, 2023, (90 days earlier, under the claim process, is no later than May 2, 2023).
Checkpoint Edge has detailed guidance on paid sick and family leave:
- FTC Par. H-4687.3 Pre-Apr. 1, 2021 (spanning Apr. 1, 2020 – Mar. 31, 2021) refundable credit against payroll taxes for paid COVID-19 sick leave (credits against FICA tax).
- FTC Par. H-4687.1 Refundable credit for paid COVID-19 sick leave (Apr. 1, 2021 – Sept. 30, 2021) including IRS extended 5-year assessment period.
- Key Issue 18G COVID-19 Emergency Paid Sick Leave and Related Credit.
- FTC Par. H-4687.4 Pre-Apr. 1, 2021 (spanning Apr. 1, 2020 – Mar. 31, 2021) refundable credit against payroll taxes for paid COVID-19 family leave (credits against FICA tax).
- FTC Par. H-4687.2 Refundable credit for paid COVID-19 family leave (Apr. 1, 2021 – Sept. 30, 2021) including IRS extended 5-year assessment period.
- FTC Par. H-4687.2B Qualified wages include health plan expenses for refundable COVID-19 payroll tax credits (Apr. 1, 2021 – Sept. 30, 2021).
- FTC Par. H-4687.2C Qualified wages include certain collectively bargained pension and apprenticeship benefits for refundable COVID-19 payroll tax credits (Apr. 1, 2021 – Sept. 30, 2021).
Employee Retention Tax Credits
The ERC, for COVID-19 relief purposes, was first available to employers beginning March 13, 2020, but wasn’t available for timely reporting until the revised Form 941 became available in Q2 2020 (see Coronavirus Aid, Relief, and Economic Security Act (CARES Act), (P.L. 116-136; 3/27/2020); IRS FAQ# 76 , COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs | Internal Revenue Service (irs.gov) for reference). The ERC provided relief for eligible employers whose business operations were fully or partially shut down by a government order or who experienced a significant decline in gross receipts (see IRC Sec. 3134 (ERC) for reference). Initially, employers could not apply for loan forgiveness under the Small Business Administration’s Paycheck Protection Program (PPP) and also claim the ERC. But by April 2021, the law changed and eligible employers could request forgiveness of a PPP loan and claim the ERC (see American Rescue Plan Act (P.L. 117-2; 3/11/2021); IRS Notice 2021-20, 2021-11 IRB 922 Covering IRC Sec. 3134 (Q&A #49) for reference). For employers who weren’t quick enough to catch the law change, or if they missed allocations for the cost of qualified employer-paid health plan benefits or certain collectively bargained pension and apprenticeship benefits as part of an employee’s qualified wages, there’s still an opportunity to amend those payroll tax returns (see IRC Sec. 3131, (paid sick leave credit); IRC Sec. 3132, (paid family leave credit) for reference).
Retroactive termination of ERC
The ERC, originally set to expire on January 1, 2022, was retroactively terminated on November 15, 2021, which meant the credit expired on October 1, 2021, for most employers other than recovery start-up businesses (see Infrastructure Investment and Jobs Act (IIJA) (P.L. 117-58; 11/15/2021). for reference). Unfortunately, many employers had already reduced their tax deposits in anticipation of a fourth-quarter 2021 ERC. For employers who are not recovery start-up businesses, repayment of unremitted taxes in anticipation of ERC must be submitted by the fourth-quarter 2021 payroll tax return filing date (see IRC Sec. 3134(n); IRS Notice 2021-65, 2021-51 IRB (12/06/21) for reference). For clients who failed to repay anticipated ERC credits claimed past the expiration date of October 1, 2021, on their fourth-quarter 2021 payroll tax return, correction and payment of the tax due on Form 941-X should occur in the period they discover the omission.
Checkpoint Edge has detailed guidance on the Employee Retention Credit:
- FTC Par. H-4687.5 Refundable ERC for employers affected by COVID-19 (wages paid after Mar. 12, 2020, and before Oct. 1, 2021).
- FTC Par. H-4687.5B1 Interaction of the COVID-19 ERC and PPP loans availability of payroll credits.
- Key Issue 18J 2021 COVID-19 Employee Retention Credit.
COBRA Premium Assistance Credit
Employers subject to federal COBRA continuation coverage requirements (generally those with at least 20 employees in the prior calendar year) and all employers that sponsor self-insured group health plans, were eligible for a 100% COBRA premium subsidy against the employer’s share of Medicare tax, from April 1, 2021, through September 30, 2021, for all assistance eligible individuals (see American Rescue Plan Act (P.L. 117-2; 3/11/2021); IRS Notice 2021-46, 2021-33 IRB (7/26/21) supplementing IRS Notice 2021-31, 2021-23 IRB (5/18/21) for reference). The premium amount includes any administrative costs (generally 102% of the applicable premium). The credit is refundable if the employer doesn’t have enough Medicare tax during the coverage period to cover the subsidy and the amount of the credit is equal to the amount the eligible individual (employee) would’ve otherwise been required to pay. A timely filed quarterly payroll tax return first claiming the premium assistance credit would’ve been due July 31, 2021, meaning a corresponding amended Form 941-X would be due no later than July 31, 2024 (90 days earlier, under the claim process, is no later than May 2, 2024).
Hundreds of thousands of employers took advantage of COVID-19 payroll tax credit relief. So, IRS is justified in vamping up its hiring and training efforts for new agents to investigate potential bad actors and help clear the related pandemic return backlog (see Treasury and IRS Announce Aggressive Plan to End Pandemic Inventory Backlog This Year, (March 10,2022) for reference). While in the past amending a payroll tax return was seen as a potential red flag to the IRS; not so today. With the complexity surrounding COVID-19 payroll tax credits, the amount of changes to the existing law, including retroactive expiration of the ERC, amended 941-X returns are going to be the norm for the foreseeable future. If a client left available COVID-19 relief credits on the table, it makes sense to amend and take advantage of the relief Congress intended.
For more information on COVID-19 payroll tax credits and amending payroll tax Form 941-X returns see:
Checkpoint Edge has detailed guidance on the COBRA Premium Assistance Credit:
- FTC Par. H-1289.15 Tax credit for premium assistance for COBRA continuation coverage – Apr. 1, 2021 – Sept. 30, 2021.
- 20,325 COBRA: General Rules (including rules for the COBRA Assistance Premium Tax Credit.
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