Claiming Pandemic-Related Payroll Tax Credits on Form 941-X
Author: Alice Gilman
In response to the COVID-19 pandemic, Congress enacted four significant laws containing payroll tax credits to assist employers:
- The Families First Coronavirus Response Act (FFCRA), which required employers with fewer than 500 employees to provide paid sick and family leave and health benefits to employees and provided payroll tax credits to employers for doing so;
- The Coronavirus Aid, Relief and Economic Security (CARES) Act, which created the Employee Retention Credit (ERC) for qualified employers that kept employees on the payroll and provided health benefits;
- The Consolidated Appropriations Act, 2021 (CAA), which amended many provisions of the FFCRA and the CARES Act; and
- The American Rescue Plan Act (ARPA), which amended all the above laws, required employers to provide a 100% COBRA subsidy and provided a payroll tax credit for doing so.
Each of these payroll tax credits was divided into nonrefundable and refundable credits, and was taken against the employer's share of Social Security or Medicare taxes. A nonrefundable tax credit can reduce tax liability to $0, but not below $0. A refundable credit can be used to generate a federal tax refund larger than the amount of tax paid for the quarter.
Employers took their payroll tax credits on Form 941, Employer's QUARTERLY Federal Tax Return, beginning with the second quarter of 2020 through the third quarter of 2021. Although all the tax credits expired on September 30, 2021, employers reviewing their books now and realizing they either qualified for a tax credit they did not take or their tax credit calculations were incorrect may still claim or adjust them by filing Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund. Employers may file Form 941-X retroactively, by the later of three years after the date the initial Form 941 was filed or two years after the date the tax reported on Form 941 was paid.
Employers that must adjust their tax credits to a lesser amount are advised to file Form 941-X to correct these errors as soon as possible. Temporary and proposed regulations allow the IRS to treat overpayments of these tax credits as tax underpayments, subject to its regular assessment and collection procedures.
The following chart summarizes the procedure for matching lines on Form 941 to Form 941-X for the purpose of claiming or adjusting these payroll tax credits. The chart also includes references to the worksheets employers must complete to make their entries on Form 941-X. Chart cells for which there are no worksheet entries are marked N/A.