Cashing in retroactively on COVID tax credits with Form 941-X? What you need to know

COVID-19 sick/family leave and employee retention (ERC) tax credits may be in the rearview mirror, but thanks to IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund Form, it’s not too late to claim them.

Before dismissing the idea that there might still be money left on the table from Q3 2021 and before, consider some of the changes that your finance team might have missed in the quarterly tax filing process during the pandemic.

For example, originally you could qualify for the ERC if you experienced a 50% loss in gross receipts in a quarter compared to the same quarter the previous year (e.g., 2020 vs. 2019). That was later modified to a 20% loss in gross receipts, said Dayna Reum, CPP, FPC, which would make more companies eligible for the tax credit.

A key clarification made by the feds mentioned by Reum in the Premier Learning Solutions on-demand workshop “IRS Form 941: Complying with Updated Requirements”: Group health plan expenses were allowed to be reported as qualified wages. So even furloughed employees who weren’t getting a paycheck could count toward your tax credit if you were still paying for their health insurance.

Also, employers could originally claim payroll tax credits against applicable quarterly employment taxes equal to 50% of qualified wages. But according to Reum, the credit was increased to 70% of qualified wages for each quarter, and the per employee wage cap changed from $10,000 in the aggregate to $10,000 per calendar quarter.

Thanks to the American Rescue Plan Act (ARPA), employers that received a Paycheck Protection Program (PPP) loan can still claim an ERC. But Reum gave an important caveat: You have to produce documentation that shows wages being reported for the tax credit weren’t coming from forgiven PPP loan proceeds.

And beware of scammers offering to get you employee retention tax credit money you supposedly missed out on. These schemes are so prevalent that they were added to the IRS Dirty Dozen list. You’re better off tackling preparing an amended return in-house.

Recalculating for emergency leave tax credits

The two weeks emergency paid sick and family care leave required for many employers under the Families First Coronavirus Response Act/Coronavirus Aid, Relief and Economic Security Act officially became optional in 2021. But according to Reum, businesses were still eligible to claim the payroll tax credit that was intended to reimburse business costs associated with that leave even if they were no longer extending COVID emergency leave to employees.

So if you’re going to assign your accounting and payroll teams with reviewing records from 2020 and 2021 to see if you should file an amended return, here’s what they need to know:

1. If leave was taken for employee self-care because of government- or healthcare provider-ordered quarantine/isolation, or seeking a medical diagnosis because of COVID symptoms, the tax credit is based on the pay the employee would’ve received, capped at $511 per day or $5,110 in the aggregate corresponding with the maximum tax credit allowed.
2. In the case of leave taken to care for dependents because of government- or healthcare provider-ordered quarantine/isolation, school or childcare facility closure, or “experiencing any other substantially similar condition,” the tax credit is based on two-thirds of the pay the employee would’ve received, capped at $200 per day or $2,000 in the aggregate corresponding with the maximum tax credit allowed.
3. ARPA added leave taken for getting a COVID vaccine and recovering from symptoms caused by a vaccine. The tax credit amount depends on whether it was the employee or a dependent getting vaccinated.

Recordkeeping responsibility

IRS is likely to take notice if you’re adjusting a return from three years ago. So it’s vital to make sure your recordkeeping can stand up to an audit.

Reum said that you must be able to provide records that show how you calculated the new tax credit amount, along with documentation that demonstrates:

• how you determined your employees were qualified to receive sick and family leave wages (“If you used healthcare expenses [as qualified wages], how did you come to that?” she said), and
• your eligibility for ERC based on suspension of operations due to the pandemic or significant decline in gross receipts.

Use the right form

“Do be aware … that there (are) no more spots on the current 941 for you to claim the Employee Retention Credit because the credit no longer exists,” Reum said, emphasizing that Form 941-X is the only way to claim COVID relief credits.

And if Finance is spring cleaning, IRS no longer accepts Form 7200, Advance Payment of Employer Credits Due to COVID-19, so there’s no reason for anyone to still be holding on to that PDF.

Filing timeliness matters again

A silver lining of the pandemic was that IRS was flexible about Form 941 filing. But of course that’s long gone, and it’s back to the firm deadlines of the last day of the month that follows the end of the quarter and back to the threat of late fees.

“Don’t wait till the due date to send your form in,” Reum cautioned. “I’ve seen employers … depend on the post office to (postmark) it based on that date. And if they don’t, you could be considered late (to file).”