How to Fill Out 941-X for Employee Retention Credit

Form 941-X serves as an adjusted employer’s quarterly federal tax return, allowing businesses to correct errors or claim adjustments on a previously filed Form 941. This amended return is frequently used by employers seeking to claim the Employee Retention Credit (ERC), a refundable tax credit for businesses that continued paying employees while impacted by the COVID-19 pandemic. This article will guide readers through preparing information, completing the form, and submitting it to the Internal Revenue Service (IRS).

Employee Retention Credit Fundamentals

The Employee Retention Credit (ERC) provides a refundable credit against certain employment taxes for eligible employers. Qualified wages encompass wages paid to employees after March 12, 2020, and generally before October 1, 2021. These wages also include the allocable share of qualified health plan expenses paid by the employer.

For 2020, the credit was 50% of qualified wages, up to $10,000 per employee for the entire year, resulting in a maximum credit of $5,000 per employee. In 2021, the credit increased to 70% of qualified wages, with a maximum of $10,000 per employee per calendar quarter. This allowed for a maximum credit of $7,000 per employee per quarter for the first three quarters of 2021. Eligibility depends on criteria such as a significant decline in gross receipts or a government-mandated suspension of operations.

The determination of whether an employer is considered a “large employer” or “small employer” also influences which wages qualify for the credit. For 2020, a large employer had more than 100 full-time employees in 2019, while for 2021, this threshold increased to more than 500 full-time employees in 2019. This distinction affects whether wages paid for working or not working qualify for the credit.

Preparing Your Information and Documentation

Before filling out Form 941-X, gather all necessary information and documentation. Employers should compile payroll records for the periods from March 13, 2020, through September 30, 2021. These records should detail employee wages, hours worked, and any qualified health plan expenses paid by the employer.

Access to previously filed Forms 941 for each quarter being amended is also necessary. These original forms provide the baseline figures that will be adjusted on Form 941-X. Additionally, documentation supporting ERC eligibility, such as gross receipts data or copies of government orders, should be readily available.

Employers must identify the total qualified wages paid for each eligible quarter, applying the per-employee limits ($10,000 total for 2020, $10,000 per quarter for 2021). The corresponding qualified health plan expenses allocable to these wages must also be calculated. These amounts are then multiplied by the applicable credit rate—50% for 2020 and 70% for 2021—to determine the total ERC for each quarter.

Ensure that any wages used for other federal credits, such as Families First Coronavirus Response Act (FFCRA) paid leave credits or wages included in Paycheck Protection Program (PPP) loan forgiveness, are not also counted for the ERC. Employers should also have their Employer Identification Number (EIN), legal business name, and current address readily accessible, matching the information on file with the IRS.

Step-by-Step Form 941-X Completion

Completing Form 941-X for an Employee Retention Credit claim involves reporting adjustments across five parts. Employers should complete a separate Form 941-X for each quarter they are amending.

Part 1: Identifying Information

On Line 1a, select the appropriate calendar quarter and year (e.g., “September 30, 2020”). On Line 2, indicate the reason for the adjustment, typically by checking box ‘a’ to correct administrative errors and box ‘c’ for claiming a credit or refund. This section also asks if the form is being filed to correct wages, tips, or taxes, which is usually the case for ERC claims.

Part 2: Certifications

An authorized person must sign and date the form under penalties of perjury. This confirms that the information provided is accurate and complete to the best of their knowledge.

Part 3: Adjusted Employment Tax

This part is where financial adjustments for the ERC are reported. Begin by entering previously reported amounts from the original Form 941 on Lines 1 through 5, such as total wages and tips, and income tax withheld.

On Line 18a, report the total qualified wages for the Employee Retention Credit. Line 18b is used to report the qualified health plan expenses allocable to these wages. The nonrefundable portion of the Employee Retention Credit is reported on Line 22a, reducing the employer’s share of social security tax.

The refundable portion of the Employee Retention Credit is entered on Line 23a. This amount is the remaining credit after the nonrefundable portion has been applied, and it can result in a direct refund to the employer. Adjustments to the employer’s share of social security and Medicare wages and tax liabilities, resulting from the ERC claim, are also made on Lines 18c, 19, 20, and 21. These lines reflect the reduction in the deduction for wages equal to the credit amount.

Part 4: Explanation of Adjustments

State clearly that the amendment is being filed to claim the Employee Retention Credit. Reference relevant legislation, such as the CARES Act. Provide a concise breakdown of the calculation, including total qualified wages and health plan expenses used to determine the credit amount for the specific quarter.

Part 5: Overpayment Application

This part indicates whether an overpayment will be applied as a credit to the next return or refunded. For most ERC claims, employers will check the box requesting a refund.

Filing Your Amended Return

After completing Form 941-X, review it for accuracy before submission. The form must be signed and dated by an authorized individual, such as the owner, a corporate officer, or a partner.

Maintain detailed supporting documentation, such as payroll records and eligibility analyses, for your own records. These documents should be kept readily accessible in case the IRS requires further clarification or conducts an audit.

The mailing address for Form 941-X depends on the state where the business’s principal place of business is located. Consult the instructions for the current Form 941-X on the IRS website to determine the correct mailing address. Sending the form to the wrong address can significantly delay processing. Use certified mail with a return receipt to confirm delivery.

After mailing the amended return, employers should anticipate a processing period that can range from several months to over a year, depending on IRS backlogs. The IRS will communicate the outcome by sending a refund check or a notice regarding the adjustment. Employers should keep a copy of the filed Form 941-X and all supporting documentation for a minimum of five years from the due date of the original Form 941 for the relevant calendar quarter, as the statute of limitations for ERC claims may be extended.