Payroll tax professionals had many questions for the IRS during a May 7 payroll industry telephone conference call with respect to tax law changes made because of COVID-19, and how those changes affect Form 941, Form 7200, and Schedule B to Form 941.
Every person who
- Withholds income tax from wages or
- Pays wages subject to FICA tax, must file Form 941, Employer’s Quarterly Federal Tax Return, for the first calendar quarter in which he meets either (1) or (2), above, and for each subsequent calendar quarter, whether or not wages are paid in those quarters, until the person has filed a final return. (Reg § 31.6011(a)-1(a)(1); Reg § 31.6011(a)-4(a)(1))
One generally must report wages he pays during the second quarter (April through June) by July 31. However, if one makes timely deposits in full payment of his taxes for the quarter, he may file by the 10th day of the second month that follows the end of the quarter. Thus, a taxpayer may file Form 941 by August 10 if he made timely deposits in full payment of his taxes for the second quarter. (Instructions to Form 941)
Background—Form 941, Schedule B.
Semiweekly depositors (i.e., employers who reported more than $50,000 of employment taxes in the lookback period (effectively, the previous four calender quarters) or who accumulated a tax liability of $100,000 or more on any given day in the current or prior calendar year) must file Schedule B with Form 941. Employers report their tax liability for each semiweekly period on this schedule.
Background—COVID-19-related changes affecting Form 941.
On the call, the IRS indicated that Form 941 needs to be revised to take into account the refundable employment tax credits included in recent COVID-19 tax legislation. For example, the Families First Coronavirus Response Act (the “FFCRA,” P.L. 116-127), which provides small and midsize employers (businesses and tax-exempt organizations with fewer than 500 employees) with refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages (qualified leave wages) to their employees for leave related to COVID-19. Qualified leave wages aren’t subject to the employer share of Social Security tax. See IRS adds to FAQs on COVID-19 family, medical and sick leave credits (04/21/2020).
The IRS also said the form needs to be updated to take into account the employee retention credit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) provides certain employers that operate a business during 2020 and retain employees (despite experiencing economic hardship related to the COVID-19 crisis) with an employee retention credit. The refundable tax credit is equal to 50% of qualified wages (which include qualified health plan expenses) paid to employees after March 12, 2020, and before January 1, 2021. If employers paid any qualified wages between March 13, 2020, and March 31, 2020, inclusive, they will include 50% of those wages, together with 50% of any qualified wages paid during the second quarter of 2020, on their second quarter Form 941, 941-SS, or 941-PR to claim the credit. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. (Act Sec. 2301(c)(3)(C); Act Sec. 2301(b)(1)) For more information about the employee retention credit, see IRS issues detailed employee retention credit FAQs (05/01/2020).
Another reason for the form to be updated is to take into account Section 2302 of the CARES Act which allows employers to defer the deposit of the employer’s share of Social Security taxes. The deferral applies to deposits of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020 and ending December 31, 2020. The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates (referred to as the “applicable dates'”) to be treated as timely (and avoid a failure to deposit penalty):
- On December 31, 2021, 50% of the deferred amount; and
- On December 31, 2022, the remaining amount.
If an employer receives a Paycheck Protection Program loan and the employer receives a decision from the lender that the loan is forgiven, then the employer may not defer the deposit of the employer’s share of Social Security tax that is otherwise due. See IRS issues guidance on CARES Act deferral of employment tax deposits (04/14/2020).
Background—claiming the family, medical and sick leave credits, and the employee retention credit.
Eligible employers may claim the family, medical and sick leave credits, and the employee retention credit, on their federal employment tax returns (e.g., Form 941), but they can benefit more quickly by filing Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request an advance payment of the tax credits for qualified sick and qualified family leave wages and/or the employee retention credit. In addition, employers may file Form 7200 if there are insufficient federal employment taxes to cover the amount of the credits. See Tips for filing Form 7200, Advance Payment of Employer Credits Due to COVID-19 (04/28/2020).
IRS encourages questions.
The IRS first told listeners that the IRS welcomes questions even if it may not have an immediate response as the IRS has found the questions to be quite helpful. Questions may be sent to SBSE.email@example.com.
Question on deferral of employment tax deposit. A popular question is how to complete Form 941, 13b (Deferred amount of the employer share of social security tax).
The draft instructions for line 13(b) remind employers not to include the employee Social Security taxes reported on lines 5a(i) and 5a(ii). Employers shouldn’t reduce the amount reported on line 13b by any credits claimed on lines 11a (Qualified small business payroll tax credit for increasing research activities), 11b (Nonrefundable portion of credit for qualified sick and family leave wages from Worksheet 1), or 11c (Nonrefundable portion of employee retention credit from Worksheet 1). However, employers can’t defer tax that they already paid; accordingly, the maximum amount that can be deferred each quarter is the employer share of Social Security tax, minus 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 of line 5a and line 5b).
The IRS said that they struggled with this area of the draft form and are still working on it. It will probably be the last part of the instructions that they edit before the instructions are finalized.
The IRS pointed out that page 13 of the draft Form 941 instructions (under the section “Repaying the deferred amount”) advises employers deferring the payment of their share of Social Security taxes that the amount may be repaid:
- Electronically using the Electronic Federal Tax Payment System (EFTPS),
- By credit or debit card, or
- By a check or money order.
The repayments should not be reported on Form 941. This guidance is preliminary and may be subject to change.
Credits for qualified sick and family leave wages. The IRS clarified that for purposes of the employer’s credit for qualified sick and family leave wages, qualified health plan expenses are not included as wages for purposes of the $5,110 paid sick leave wage cap; whereas, for purposes of the employee retention credit, qualified health plan expenses are included as wages for purposes of the $10,000 wage cap.
Form 7200. Employers may file Form 7200 to request an advance payment of the tax credits for qualified sick and qualified family leave wages, and the employee retention credit. Form 941, Part 1, line 13f, is where employers will report total advances received from filing Form(s) 7200 for the quarter, beginning in second quarter 2020. Reporting agents are concerned that the information they receive from clients with regard to whether they received an advance payment of the credit may be inaccurate which would then result in an inaccurate Form 941.
The IRS noted that reporting agents may request a transcript to determine if their client received an advance payment of the credit. This will currently appear on an IRS transcript as a COBRA Premium Assistance Credit. Some tax professionals commented that they have yet to see this information on a transcript.
The IRS said it does not expect to process a Form 7200 for a quarter if the employer has already filed Form 941 for that quarter. The draft Form 941 instructions specifically state that employers that filed a Form 7200 before the end of the quarter, but haven’t received the advance before filing Form 941, should not include that amount on Form 941, Part 1, line 13f (Total advances received from filing Form(s) 7200 for the quarter).
Form 941, Schedule B. The IRS does not expect to revise the schedule, but it might revise the instructions. The IRS said, with respect to the COVID-19 legislation, that the liabilities on the schedule should only be reduced by nonrefundable credits that the employer receives. Employers, however, may be able to reduce their tax deposits by both the nonrefundable and refundable tax credits.
To continue your research on Form 941, see FTC 2d/FIN ¶S-2603; United States Tax Reporter ¶35014.002.
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