Recent legislation, designed to help small businesses harmed by COVID-19, has dramatically altered Form 941. The June 2021 changes add over ten new lines and five new worksheets to an already complicated form.
In general, Form 941 was updated to reflect provisions under the American Rescue Plan Act (ARP), enacted March 11, 2021. While the ARP extended many of the existing COVID-inspired credits, and uses the same terminology, it tweaked how the credits are taxed/reported, and added a few new benefits. Much of Form 941’s June 2021 complexity was added to account for these changes. Confused? Check out TaxMe’s automated solution that seamlessly incorporates it all. Easy. Accurate. Secure.
The changes can be grouped into five main categories:
1. The COVID-19 Related Credit for Qualified Sick and Family Leave Wages has been Extended and Amended
The ARP provides credits for qualified sick and family leave wages similar to the credits that were previously enacted by COVID-inspired legislation. The ARP provides for qualified wages paid for leave taken after March 31, 2021, and before October 1, 2021. Below are the major changes made under the ARP.
- The ARP keeps the daily wage thresholds that previously existed. The aggregate cap on qualified sick leave wages remains at 80 hours (10 days), but the limitation on the number of days resets on April 1, 2021. The aggregate cap on qualified family leave wages increases to $12,000 from the previous cap of $10,000, and the aggregate cap resets on April 1, 2021.
- The ARP created a new category of leave to include the time the employee is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19. The new category of leave applies to similar situations and voluntary for employers.
- The credits are still increased by the qualified health plan expenses allocable to the qualified sick and family leave wages, but the credits are now also increased, subject to the credit limitations, by certain amounts paid under collective bargaining agreements that are properly allocable to the qualified leave wages.
- The credits are increased by the amount of the employer share of social security tax and Medicare tax on the qualified sick and family leave wages.
- Governmental employers, except for the federal government (and its agencies and instrumentalities, except for those that are described in section 501(c)(1)), may now claim the credits.
- Generally, the same wages can’t be used as both qualified sick leave wages and qualified family leave wages (and none of the wages can be used for the employee retention credit or forgiven wages under the Paycheck Protection Program (PPP)).
- The credit for qualified sick and family leave wages isn’t allowed in a quarter in which the employer provides the leave in a manner that discriminates in favor of highly compensated employees, full-time employees, or employees on the basis of employment tenure.
Importantly, how you report qualified sick and family leave wages and the credit for qualified sick and family leave wages has changed. Taxable qualified sick and family leave wages for leave taken after March 31, 2021, are included on line 5a and taxed at 12.4% for social security tax purposes. However, if you’re reporting any qualified sick and family leave wages for leave taken before April 1, 2021, these wages are reported on lines 5a(i) and 5a(ii), respectively, and taxed at 6.2% for social security tax purposes.
Form 941 adds new lines with cutoff dates to demarcate pre- and post-ARP changes in credits for qualified sick and family leave wages, and qualified health plan expenses allocable to those wages. The new worksheets help you figure the credit.
2. The COVID-19 Related Employee Retention Credit has been Extended and Amended
The ARP adds an employee retention credit (ERC) similar to the credit that was previously enacted by COVID-inspired legislation. The ERC is available for qualified wages paid before January 1, 2022. Generally, the rules for the employee retention credit for the second quarter of 2021 and third and fourth quarters of 2021 are substantially similar. However, some changes under the ARP begin July 1, 2021, and are applicable for only the third and fourth quarters of 2021.
- The ARP creates a new category of an eligible employer called a recovery startup business for certain smaller employers that began operations after Feb. 15, 2020, that partially or fully shut down due to a significant decline in gross receipts or because of a governmental order. Recovery startup businesses are limited to a maximum employee retention credit of $50,000 per quarter. If you check the box on line 18b, don’t enter more than $50,000 per quarter in total on lines 11c and 13d.
- Qualified wages for the ERC don’t include wages taken into account for credits under sections 41 (credit for increasing research activities), 45A (Indian employment credit), 45P (employer wage credit for employees who are active-duty members of the uniformed service), 45S (employer credit for paid family and medical leave, 51 (work opportunity tax credit), 1396 (empowerment zone employment credit), 3131 (credit for paid sick leave), and 3132 (credit for paid family leave). Additionally, qualified wages for the employee retention credit can’t include amounts used as payroll costs for a Small Business Interruption Loan under the PPP that is forgiven or amounts used as payroll costs for shuttered operator grants and restaurant revitalization grants.
- For wages paid before July 1, 2021, the nonrefundable portion of the employee retention credit is against the employer share of social security tax. However, for wages paid after June 30, 2021, the nonrefundable portion of the employee retention credit is against the employer share of Medicare tax.
- For the second quarter 2021, use Worksheet 2 to figure the credit for wages paid before July 1, 2021. For the third and fourth quarters 2021, use Worksheet 4 to figure the credit for wages paid after June 30, 2021, and before January 1, 2022.
3. New COBRA Premium Assistance Payments
The ARP provides a temporary 100% subsidy for premiums for COBRA continuation coverage, to be paid by employers or other taxpayers to whom eligible individuals would otherwise pay the premiums. In turn, that aid is reimbursed via a refundable credit against the employer’s portion of Medicare tax. Form 941 contains new lines for employers to enter nonrefundable and refundable portions of the COBRA premium assistance credit (lines 11e and 13f, respectively), as well as the number of persons provided COBRA premium assistance (line 11f).
This COBRA premium assistance is available for periods of coverage beginning on or after April 1, 2021, through periods of coverage beginning on or before September 30, 2021. Use Worksheet 5 to help calculate the nonrefundable and refundable COBRA-credit amounts.
4. Advanced Payment of COVID-19 Credits Extended
Based on the extensions of the credit for qualified sick and family leave wages and the employee retention credit, and the new credit for COBRA premium assistance payments, Form 7200, Advance Payment of Employer Credits Due to COVID-19, may be filed to request an advance payment.
5. Form 941 Worksheet Summary
Form 941 previously had one Worksheet that helped figure the nonrefundable and refundable portion of the Qualified Sick and Family Leave Wages and Employee Retention Credit (ERC).
The ARP eliminated this single worksheet and replaced it with five new ones:
- Worksheet 1 is for Qualified Sick and Family Leave Wages Taken Before April 1, 2021.
- Worksheet 2 is for ERC paid before July 1, 2021 (i.e., used only for the Second Quarter 2021).
- Worksheet 3 is for Qualified Sick and Family Leave Wages Taken After March 31, 2021.
- Worksheet 4 is for ERC taken after June 30, 2021 (i.e., used only for Third and Fourth Quarters of 2021).
- Worksheet 5 is for COBRA Premium Assistance Credit.
The Worksheets are designed to work independently of each other. As such, they repeat calculations. For example, Worksheet 1, steps 1a-1l are identical to Worksheet 2, steps 1b-1n, and Worksheets 4 & 5 have steps identical to Worksheet 3, Steps 1a-1f.
Form 941, Part 1 Changes Line By Line
Report for this Quarter of 2021 Box. The ability to select January, February, March is deactivated.
Line 1. The line description was changed to eliminate reference to quarter 1.
Line 5a Taxable social security wages. While not new, this line now includes taxable qualified sick and family leave wages for leave taken after March 31, 2021. These wages will be taxed at 12.4%.
Line 5a(i) Qualified sick leave wages. While not new, only use 5a(i) for qualified sick wages paid after March 31, 2020 for leave taken before April 1, 2021. These wages will be taxed at 6.2% (i.e., the tax is calculated using only the employee portion rate of 6.2% as the employer portion of Social Security tax was exempted by law).
Line 5a(ii) Qualified family leave wages. While not new, only use 5a(ii) for qualified family wages paid after March 31, 2020, for leave taken before April 1, 2021. These wages will be taxed at 6.2% (i.e., the tax is calculated using only the employee portion rate of 6.2% as the employer portion of Social Security tax was exempted by law).
Lines 5b-11a. No changes.
Line 11b. Nonrefundable portion of credit for qualified sick and family leave wages for leave taken before April 1, 2021. The line description was changed to eliminate reference to Worksheet 1 and now notes it applies only to wages taken before April 1, 2021. Note: Worksheet 1, Step 2, line 2j is moved to Form 941, line 11b.
Line 11c Nonrefundable portion of employee retention credit. The line description was changed to eliminate reference to Worksheet 1. Note: For the second quarter 2021, Worksheet 2, Step 2, line 2h is moved to Form 941, line 11c. For the third and fourth quarters 2021, Worksheet 4, Step 2, line 2h is moved to Form 941, line 11c.
NEW LINE. Line 11d Nonrefundable portion of credit for qualified sick and family leave wages for leave taken after March 31, 2021. This new line was included to capture qualified sick and family leave wages taken after March 31, 2021. Note: Worksheet 3, Step 2, line 2r is moved to Form 941, line 11d.
NEW LINE. Line 11e. Nonrefundable portion of COBRA premium assistance credit (see instructions for Applicable quarters). This new line was included to capture information related to the new COBRA credit. Note: Worksheet 5, Step 2, line 2g is moved to Form 941, line 11e.
NEW LINE. Line 11f. Number of individuals provided COBRA premium assistance. This new line was included to capture information related to the new COBRA credit.
Line 11g. Total nonrefundable credits. While not new, the line description was updated to add the new nonrefundable amounts listed in new lines 11d and 11e.
Line 12. Total taxes after adjustments and nonrefundable credits. While not new, the line description was updated to new numbering.
Lines 13 a-b. No change.
Line 13c. Refundable portion of credit for qualified sick and family leave wages for leave taken before April 1, 2021. The line description was changed to eliminate reference to Worksheet 1 an now notes its applies only to the refundable portion of the credit taken before April 1, 2021. Note: Worksheet 1, line 2k moved to line 13c.
Line 13d. Refundable portion of employee retention credit. The line description was changed to eliminate reference to Worksheet 1. Note: For the second quarter 2021, Worksheet 2, Step 2, line 2i is moved to Form 941, line 13d. For the third and fourth quarters 2021, Worksheet 4, Step 2, line 2i is moved to Form 941, line 13d.
NEW LINE. Line 13e. Refundable portion of credit for qualified sick and family leave wages for leave taken after March 31, 2021. This new line was included to capture refundable portion of the credit taken after March 31, 2021. Note: Worksheet 3, line 2s moved to line 13e.
NEW LINE. Line 13f. Refundable portion of COBRA premium assistance credit (see instructions for applicable quarters). This new line was included to capture refundable portion of the COBRA credit for the applicable quarter. Worksheet 5 helps figure the credit. Worksheet 5, line 2h is moved to line 13f.
Lines 13g-13i. Total deposits and refundable credits; Total advances received from filing Form(s) 7200 for the quarter and Total deposits and refundable credits less advances. These are previous form 941 lines 13e-13g, renumbered to accommodate the additional lines.
Line 14 Balance Due. The line description was changed to reflect the new numbering.
Line 15 Overpayment. The line description was changed to reflect the new numbering.
Form 941, Part 3 Changes Line By Line
Line 17. No change.
Line 18a. If you’re a seasonal employer and you don’t have to file a return for every quarter of the year. While not new, this line is numbered differently. It previously was line 18.
NEW LINE. Line 18b. If you’re eligible for the employee retention credit solely because your business is a recovery startup business. This new line adds a checkbox to select if you’re eligible for the ERC solely by this new credit, as provided by the ARP.
Line 19. Qualified health plan expenses allocable to qualified sick leave wages for leave taken before April 1, 2021. The line description was changed to note it applies only to sick leave taken before April 1, 2021. This amount is entered on Worksheet 1, Step 2, line 2b.
Line 20. Qualified health plan expenses allocable to qualified family leave wages for leave taken before April 1, 2021. The line description was changed to note it applies only to family leave taken before April 1, 2021. This amount is entered on Worksheet 1, Step 2, line 2f.
Line 21. Qualified wages for the employee retention credit. While this line is the same, the amount is added to a new Worksheets. For the second quarter of 2021, this amount is entered on Worksheet 2, Step 2, line 2a. For the third and fourth quarters of 2021, this amount is entered on Worksheet 4, Step 2, line 2a.
Line 22. Qualified health plan expenses for the employee retention credit. The line description was changed to eliminate reference to “wages reported on line 21”. For the second quarter of 2021, this amount is entered on Worksheet 2, Step 2, line 2b. For the third and fourth quarters of 2021, this amount is entered on Worksheet 4, Step 2, line 2b.
NEW LINE. Line 23. Qualified sick leave wages for leave taken after March 31, 2021. This new line was included to capture qualified sick leave wages for leave taken after March 31, 2021. This amount is entered on Worksheet 3, Step 2, line 2a.
NEW LINE. Line 24. Qualified health plan expenses allocable to qualified sick leave wages reported on line 23. This new line was included to capture qualified health plan expenses allocated to qualified sick leave wages taken after March 31, 2021 (and reported on line 23). This amount is entered on Worksheet 3, Step 2, line 2b.
NEW LINE. Line 25. Amounts under certain collectively bargained agreements allocable to qualified sick leave wages reported on line 23. This new line was included to capture amounts under certain collectively bargained agreements allocated to qualified sick leave wages taken after March 31, 2021 (and reported on line 23). This amount is entered on Worksheet 3, Step 2, line 2c.
NEW LINE. Line 26. Qualified family leave wages for leave taken after March 31, 2021. This new line was included to capture qualified family leave wages for leave taken after March 31, 2021. This amount is entered on Worksheet 3, Step 2, line 2g.
NEW LINE. Line 27. Qualified health plan expenses allocable to qualified family leave wages reported on line 26. This new line was included to capture qualified health plan expenses allocated to qualified family leave wages taken after March 31, 2021 (and reported on line 26). This amount is entered on Worksheet 3, Step 2, line 2h.
NEW LINE. Line 28. Amounts under certain collectively bargained agreements allocable to qualified family leave wages reported on line 26. This new line was included to capture amounts under certain collectively bargained agreements allocated to qualified family leave wages taken after March 31, 2021 (and reported on line 26). This amount is entered on Worksheet 3, Step 2, line 2i.
Old Line 23: Credit from Form 5884-C, line 11, for this quarter. This line was removed from Form 941 (and is now asked only as part of supplemental worksheets).
Additional Information (used to calculate supplemental worksheets)
Amount Claimed on Form 5884-C, line 11 for this quarter. Recall, this credit is a Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veteran. Note: This amount is entered in Worksheet 1, line 1j and Worksheet 2, line 1k.
Amount Claimed on Form 5884-D, line 12 for this quarter. Recall, this credit is an Employee Retention Credit for Certain Tax-Exempt Organizations Affected by Qualified Disasters. Note: This amount is entered in Worksheet 1, line 1j(i) and Worksheet 2, line 1l.
Enter any credit claimed under section 41 for increasing research activities with respect to any wages taken into account for the credit for qualified sick and family leave wages. Note: This amount is entered in Worksheet 3, line 2o.
Enter the COBRA premium assistance that you provided this quarter. Note: This amount is entered in Worksheet 5, line 2a.
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