Revised Form 941 Released for Second, Third, and Fourth Quarters of 2021

The IRS revised Form 941, Employer’s Quarterly Federal Tax Return, to reflect the American Rescue Plan Act of 2021. These changes affect Form 941 for the second, third, and fourth quarters of 2021 to reflect:

• the new employer credits for sick leave and family leave wages,
• the expanded employee retention credit, and
• the COBRA premium assistance credit.

These credits are claimed against the employer’s share of employment taxes, but a portion of them may be refundable.

New Credits for Sick Leave and Family Leave

The Form 941 changes reflect two new credits against the employer’s share of employment taxes:

1. a credit for sick leave, and
2. a credit for family leave.

These credits apply to qualified wages paid for sick leave and family leave taken after March 31, 2021, and before October 1, 2021. They are also increased by the employer’s share of social security tax and Medicare tax on the qualified sick and family leave wages.

The sick leave and family leave credits do not apply to wages that are taken into account for:

• the employee retention credit;
• restaurant revitalization and shuttered operator grants,
• forgiven Paycheck Protection Program (PPP) loans, and
• wages paid during any quarter in which the sick leave and family leave discriminate in favor of full-time or highly compensated employees.

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The same wages also cannot generally be used as both qualified sick leave wages and qualified family leave wages.

Claiming the Credits for Sick Leave and Family Leave

Beginning in the second quarter of 2021, the credits for leave taken after March 31, 2021, are reported on Form 941, Worksheet 3. Taxable qualified sick and family leave wages are included on line 5a and taxed at 12.4% for social security tax purposes. The nonrefundable portion of the credit is reported on line 11d, and any refundable portion of the credit is reported on line 13e.

The credits for the first quarter of 2021 were calculated on Worksheet 1.

Employee Retention Credit Extended and Amended

The American Rescue Plan Act also added a new employee retention credit (ERC) for qualified wages paid during the last six months of 2021. The credit is similar to the ERC that was previously enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Thus, the credit rules for the third and fourth quarters of 2021 are substantially similar to the rules that applied to the second quarter.

However, several changes are effective July 1, 2021, and apply only to the third and fourth quarters of 2021. For example, the new ERC applies to two new categories of an eligible employers:

1. a recovery startup business that began carrying on a trade or business after February 15, 2020, and had average annual gross receipt of $1 million or less for its previous three tax years
2. a severely financially distressed employer whose gross receipts during the second or third quarter of 2021 are less than 10% of its gross receipts for the same quarter in 2019.

Qualified wages for purposes of the new ERC do not include wages that are taken into account for:

• most other employment-related credits
• a forgiven PPP loan, or
• shuttered operator and restaurant revitalization grants.

Claiming the New ERC

Employers use Form 941, Worksheet 4 to claim the new ERC for wages paid after June 30, 2021. The nonrefundable portion of the credit is credited against the employer’s share of the Medicare tax, and claimed on line 11c. Any refundable portion of the credit is claimed on line 13d.

For second quarter wages paid before July 1, 2021, the nonrefundable portion of the credit was credited against the employer’s share of the Social Security tax and claimed on Worksheet 2.

COBRA Premium Assistance Credit

Perhaps the most obvious change to the revised Form 941 is the lines related to the COBRA Premium Assistance Credit that employers may claim against their share of Medicare taxes. The credit reimburses employers for COBRA insurance premiums that former or current employees failed to pay after their hours were reduced or their employment was terminated. This credit applies to COBRA coverage periods that begin between April 1 and September 30, 2021.

Claiming the COBRA Premium Assistance Credit

Employers who claim the COBRA premium assistance credit must report the number of individuals who received COBRA premium assistance on Form 941, line 11f. The employer calculates the credit on Worksheet 5, reporting the nonrefundable portion on line 11e and any refundable on line 13f.