On September 30, 2020, the IRS updated Form 941, Employer’s Quarterly Federal Tax Return, for the second time in as many quarters to accommodate President Trump’s executive order. Recall, employers use Form 941 to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks.

Employers should use this version to file their third quarter payroll tax returns (window closes on Monday, Nov. 2, 2020).

Previously, on June 20, 2020, the IRS substantially changed Form 941 for the second quarter to collect information about the COVID-19 tax incentives provided to small businesses, expanding the form from two to three pages, and adding 58 new data fields (previously 18 total lines).  Many were unprepared for its new complexity. Click here for additional information: (https://smallbizclub.com/finance/important-irs-finalizes-changes-to-payroll-tax-return-form-941/)

Thus, for each quarter of 2020, the IRS issued a different version of Form 941:

1Q – The “Old” Version that existed for all of 2019

2Q – Updated for COVID-19 Changes

3Q – Updated for Trump’s Executive Order

Purpose

For the third quarter, the IRS updated Form 941 to incorporate President Trump’s Aug. 8, 2020 executive order, which aims to provide temporary assistance to workers who are facing financial burdens due to the COVID-19 pandemic, by deferring the withholding, deposit and payment of certain employee payroll taxes until Jan. 1, 2021. In general, the deferral applies to employee paychecks issued between September 1, 2020, and December 31, 2020, and to employees whose wages are less than $4,000 for a biweekly pay period (approximately $104,000 per year) or the equivalent threshold amount with respect to other pay periods. You can find additional information here.

Mechanical Changes to Form 941

The 2020 third quarter changes mainly involve lines 13b, 24 and 25.

Line 13b

In the second quarter version of Form 941, Line 13b was used to report the “Deferred amount of the employer share of Social Security tax.” The employee share of Social Security tax could not be deferred. In the third quarter version, Line 13b was redesignated as “Deferred amount of Social Security tax” because President’s executive order permits employees to defer their share of Social Security tax with respect to qualifying compensation paid from Sept. 1, 2020 to Dec. 31, 2020.

Accordingly, the third quarter Line 13b is used to report the total amount of deferred Social Security tax: the employer portion (50% of which can be deferred until Dec. 31, 2021 and the balance deferred to Dec, 31, 2022), and now the above-described employee portion (which can be deferred until Jan. 1, 2021 and must be fully repaid by April 30, 2021).

Lines 24 & 25

In the second quarter version of Form 941, Lines 24 and 25 were used to report employee retention credit data for the period from March 13 to 31, 2020. In the third quarter version, Line 24 is repurposed and is used for indicating how much of the total deferred amount reported on Line 13b consists of the employee share of Social Security tax, and Line 25 is marked as reserved for future use.

These changes were added so the IRS can differentiate between employee and employer Social Security tax deferrals reported on line 13b.

There are other minor changes to the form.

Form 941 Third Quarter Instructions

In addition to changes to the form itself, the IRS issued new form instructions.

Guidance on how to report paying employee Social Security taxes in the same quarter they were deferred.

If employers defer payment of the employee and/or employer share of Social Security tax and subsequently pay or deposit that deferred amount in the same quarter it was deferred, they are instructed to report the amount of the payment or deposit on Form 941, line 16, or on Schedule B (Form 941) on the date of the payment or deposit and not the date of liability. The employer shouldn’t include any portion of the deferred amount of Social Security taxes already paid or deposited by the end of the quarter on Form 941, line 13b.

IRS Example: if you’re a monthly schedule depositor that has an employment tax liability of $1,000 every month in 2020 and you defer $200 of the employer’s share of Social Security tax from your July liability, but deposit your deferred amount of $200 together with your $1,000 deposit for your August tax liability, you would report $800 for your July tax liability ($1,000 minus $200) and $1,200 for your August liability ($1,000 plus $200) on line 16. Don’t include the $200 deferral on Form 941, line 13b.

Clarification: Employee Social Security tax deferrals not allowed for amounts already withheld and deposited in prior quarters

The Form 941 instructions also clarify that employers are not allowed to defer employee Social Security taxes for quarters in which they already withheld and deposited the employee’s Social Security tax. Specifically, the instructions state that “you can’t defer tax that you have already paid; therefore, the maximum amount of Social Security tax (both the employer and employee share of Social Security tax) that can be deferred each quarter is the lesser of (1) the total of the employer and employee share of Social Security tax, or (2) the excess of (a) line 10 (reduced by the amount, if any, on line 11a) over (b) line 13a.”

However, in determining whether any amount of the employer share of Social Security tax was already deposited for this purpose, businesses can consider prior deposits during the quarter as first being deposited for employment taxes other than Social Security tax. The IRS indicated amounts deposited and tagged with an identification subcategory are for informational purposes only.

Clarification: Employers may allow employees to opt in or opt out of the Social Security tax deferral

There was an open question of whether employees could opt out of the employee Social Security tax deferral in the event the employer has elected to participate. The Form 941 instructions address this question by stating that “nothing prohibits employers from getting employee input on whether to apply the relief to postpone the due date for the withholding and payment of the employee share of Social Security tax on applicable wages paid to the employee.”

Clarification: Figuring the employee Social Security tax deferral on supplemental wages

Because the employee Social Security tax deferral is available only in those biweekly payroll periods that the employee’s wages are less than $4,000 (or the equivalent amount for pay periods other than biweekly), there are questions of how to treat supplemental wages (such as a bonus or commission).  The instructions provide guidance on the calculation mechanics when supplemental wages are paid.

Employer Compliance & Form 941

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