Changes to Reporting Tax Liabilities if you Claim Certain Nonrefundable Credits

 

The line 16 instructions in the Instructions for Form 941 (Rev. April 2020) and the Instructions for Form 941-SS (Rev. April 2020), as well as the Instructions for Schedule B (Form 941) (Rev. June 2020), directed employers to reduce their tax liability reported on Form 941, line 16, or Schedule B (Form 941)  by the nonrefundable portion of the credit for qualified sick and family leave wages and the nonrefundable portion of the employee retention credit by taking into account the nonrefundable portion of the credits against the liability for the employer share of social security tax starting with the first payroll payment of the quarter that includes payments of wages subject to social security tax to your employees. The instructions continued by stating that the nonrefundable portion of the credits may be taken to the extent of the employer share of social security tax on wages associated with the first payroll payment, and then to the extent of the employer share of social security tax associated with succeeding payroll payments in the quarter until the credit is used.

To avoid assessment of failure-to-deposit penalties, the IRS is now changing these instructions. Line 16 of Form 941 or Form 941-SS or, if applicable, Schedule B (Form 941) should be completed as follows.

In completing line 16 of Form 941 or Form 941-SS or Schedule B (Form 941), you take into account the entire quarter's  nonrefundable portion of the credit for sick and family leave wages (including the qualified health plan expenses and employer share of Medicare tax allocable to those wages) and/or the entire nonrefundable portion of the employee retention credit against the liability for the first payroll payment of the quarter, but not below zero. Then reduce the liability for each successive payroll payment in the quarter until the nonrefundable portion of the credit is used. Note that your total tax liability for the quarter must equal your total taxes shown on Form 941 or Form 941-SS, line 12. The refundable portion of the credits doesn’t reduce the liability reported on line 16 of Form 941 or Form 941-SS or Schedule B (Form 941).

Example. Maple Co. is a semiweekly schedule depositor that pays employees every other Friday. In the third quarter of 2020, Maple Co. had pay dates of July 10, July 24, August 7, August 21, September 4, and September 18. Maple Co. paid qualified sick and family leave wages on August 7 and August 21. The nonrefundable portion of the credit for qualified sick and family leave wages for the quarter is $10,000. On Schedule B (Form 941), Maple Co. will use the $10,000 to reduce the liability for the July 10 pay date, but not below zero. If any nonrefundable portion of the credit remains, Maple Co. applies it to the liability for the July 24 pay date, then the August 7 pay date, and so forth until the entire $10,000 is used.

For information on reducing deposits for the credit for qualified sick and family leave wages and the employee retention credit, see Notice 2020-22, 2020-17 I.R.B. 664.  See IRS.gov/PLC, IRS.gov/ERC, and IRS.gov/ETD for further explanation on reducing deposits for the credits and the deferral of the employer social security tax.

Form 941 and Form 941-SS and their instructions will be revised for the third quarter of 2020 and these instructions will be included in the revised instructions for Form 941 and Form 941-SS. There will also be a September 2020 revision of the Instructions for Schedule B (Form 941) that will include these updated instructions.