Understanding the Employee Retention Credit and How to Report it on Form 941

Understand how to report employee retention credit on form 941. Learn about eligibility requirements, filing procedures and more.

Understanding the Employee Retention Credit and How to Report it on Form 941

The Employee Retention Credit (ERC) is a tax credit available to employers who have seen a reduction in their gross income due to the coronavirus pandemic. It is requested by submitting an eligible wage on line 30 of Form 941-X. When filing Form 941-X, make sure that all the correct information is provided and that all relevant documents are included. Neither the part of the credit that reduces employment taxes applicable to the employer nor the refundable part of the credit are included in the employer's gross income.

In these circumstances, the third payer files a payroll tax return (such as Form 94) for the wages he paid to employees with his name and EIN, and the common-law employer files a payroll tax return for the wages he paid directly to employees under his own name and EIN. Eligible employers will report their total qualifying wages and related health insurance costs for each quarter on their payroll tax returns (generally, Form 941, Employer's Quarterly Federal Tax Return) for the applicable period. In addition, an eligible employer can file a request for reimbursement and make an interest-free adjustment for a previous quarter to claim the employee retention credit to which they were entitled in a previous quarter, following the rules and procedures for making such requests or adjustments. If a third-party payer applies for the employee retention credit on behalf of the client employer, the third-party payer can rely on information from the client employer about the client employer's eligibility to apply for the employee retention credit, and the client employer can maintain all records that prove their eligibility to receive the employee retention credit. If an eligible employer completely reduces the required federal payroll tax deposits that would otherwise be due to the wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and has not paid qualifying wages that exceed this amount, it should not file Form 7200. An eligible employer can obtain Form 7200, Prepayment of Employer Credits Due to COVID-19, online and can fax their completed form to 855-248-0552. Employer F can file a Form 7200 to request a credit or refund of this amount before the end of the quarter (but not for any amount of the employee retention credit that has already been used to reduce the deposit obligation).

To help accelerate and ensure proper processing of Form 7200 and reconciliation of prepayment of credits with employment tax return when an employer uses an outside payer, such as a CPEO agent, PEO, or other agent of section 3504, for only a portion of its workforce, a common law employer must include name and EIN of third payer only on Form 7200 for prepayment of credits for salaries paid by third payer and declared in third-party payer's payroll tax return. Disaster loan counselors can help your business with complex and confusing employee retention credit (ERC) and employee retention tax credit (ERTC) program. All forms and policies must be reviewed by legal counsel to verify that they comply with applicable law and must be modified to adapt them to culture, industry and practices of your organization. If an eligible employer decides not to apply for employee retention credit in one calendar quarter, they are not prohibited from requesting credit in later calendar quarter for qualifying wages paid in that next quarter, as long as they meet requirements to apply for credit. The IRS submits an advance publication of IRS tax form, guidelines or publication for information on new Form 941-X.

In summary, understanding how to report employee retention credit on form 941 is essential for employers who have seen a reduction in their gross income due to COVID-19. It is important to review all forms and policies with legal counsel before submitting them.

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