How to File 941-X for Employee Retention Credit

The Employee Retention Credit (ERC) was a refundable tax credit for businesses that retained employees during the COVID-19 pandemic. Employers use IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to retroactively claim the ERC or correct previously filed employment tax returns. This form adjusts a previously filed Form 941, Employer’s Quarterly Federal Tax Return, allowing eligible businesses to secure credits they may have initially overlooked.

Information Needed to Claim Employee Retention Credit on Form 941-X

Businesses must review their eligibility for each quarter before claiming the ERC on Form 941-X. Eligibility depends on a significant decline in gross receipts or a full or partial suspension of business operations due to a government order. For 2020, a business qualified if its gross receipts in a quarter were less than 50% of those in the same 2019 quarter, with eligibility continuing until gross receipts exceeded 80% of the 2019 comparable quarter. In 2021, the threshold was a 20% reduction compared to the same quarter in 2019 or the immediately preceding quarter. A business also qualified if a government authority mandated a full or partial suspension of its operations due to COVID-19.

Calculating the credit requires identifying “qualified wages,” which include cash wages and certain qualified health plan expenses paid by the employer. For 2020, the ERC was 50% of qualified wages, up to $10,000 in wages per employee annually, capping the credit at $5,000 per employee. In 2021, the credit increased to 70% of qualified wages, with a maximum of $10,000 in wages per employee per quarter, allowing up to $7,000 per employee per quarter, or $21,000 for the first three quarters. For employers with 100 or fewer full-time employees in 2019 (for 2020 claims) or 500 or fewer (for 2021 claims), qualified wages generally included all wages paid during the eligible period. For larger employers, qualified wages were limited to wages paid to employees not providing services due to suspension or decline in gross receipts.

Thorough documentation is necessary to support the claim. This includes original Forms 941 for relevant quarters, detailed payroll records (wages paid, employee count, employment dates), and records of qualified health plan expenses. Businesses should also gather documentation proving gross receipts decline or copies of government orders for operations suspension. Any other tax credits affecting the ERC, such as those related to the Families First Coronavirus Response Act (FFCRA) or Paycheck Protection Program (PPP) loans, should be documented to avoid claiming the same wages multiple times.

Completing Form 941-X for Employee Retention Credit Claims

To claim the ERC, businesses must obtain Form 941-X from the IRS website. Each quarter claimed requires a separate Form 941-X. Complete the identifying information at the top of each page, including the Employer Identification Number (EIN), business name, address, and the specific calendar quarter and year being corrected.

In Part 1 of Form 941-X, select Box 2, indicating a “Claim for Refund,” and specify the quarter and year for adjustment. Part 2 requires checking Box 3, certifying the business applied Section 3121 to wages, and Box 5d, indicating the claim is for taxes not withheld from employee pay.

Part 3 is for core ERC adjustments. Businesses use information from their ERC calculations to populate various lines. The nonrefundable ERC portion is entered on Line 18a, and the refundable portion on Line 26a. The form requires reporting qualified wages for the ERC on Line 30 and qualified health plan expenses on Line 31a. The difference between previously reported amounts (Column A) and corrected amounts (Column B) is entered in Column C, with an explanation in Column D.

Part 4, Line 43, requires a clear explanation of adjustments. Businesses should explicitly state the claim is for the ERC and reference the specific quarters involved, detailing the basis for eligibility (e.g., gross receipts decline or government-mandated suspension). In Part 5, an authorized individual must sign and date the form, providing their title. If applicable, include the paid preparer’s name, PTIN, and EIN.

Filing Your Form 941-X and Post-Submission Steps

After completing Form 941-X, thoroughly review it for accuracy to prevent processing delays or issues. Prepare required supporting documentation, including detailed ERC calculation worksheets, payroll summaries, and copies of relevant government orders. Remember that original documents should not be sent unless specifically requested by the IRS.

The correct mailing address for Form 941-X depends on your business’s location. The IRS provides specific addresses in the Form 941-X instructions or IRS Publication 15. Utilize a trackable mail service, such as certified mail with return receipt, to ensure proof of mailing and delivery.

After filing Form 941-X, anticipate varying processing times, from several months to over a year, due to high claim volume and increased scrutiny. The IRS may request additional information, which should be responded to promptly and accurately to avoid further delays. Refunds are typically issued via direct deposit or paper check. Maintain a comprehensive copy of the filed Form 941-X and all supporting documentation for future reference and potential IRS audits.