Instructions for Form 941 Checklist: Tax Year 2020
The 2020 Form 941 introduced significant changes for eligible employers navigating coronavirus relief provisions under the CARES Act and the Families First Coronavirus Response Act.
Employers with fewer than 500 employees must understand how to report qualified leave wages, calculate the Employee Retention Credit, and reconcile payroll taxes across all four quarters. The Internal Revenue Service revised Form 941 multiple times in 2020 to accommodate emergency paid sick leave, expanded family and medical leave, and employer social security tax deferrals.
Understanding CARES Act Credits and FFCRA Paid
Leave Provisions
Enacted in response to the COVID-19 pandemic, the Families First Coronavirus Response Act created two key paid leave programs under the Emergency Paid Sick Leave Act and the
Emergency Family and Medical Leave Expansion Act. Under these provisions, qualified sick leave wages allow eligible employees to receive up to 80 hours of paid leave when they are unable to work due to quarantine orders, the need for a medical diagnosis, or the care of a son or daughter whose school or place of care has closed.
In addition, qualified family leave wages provide up to 10 weeks of paid leave at two-thirds of an employee’s regular rate when child care responsibilities arise from COVID-19–related closures.
Separate from FFCRA paid leave credits, the Employee Retention Credit applies to eligible employers that experienced either a government-mandated suspension of operations or a significant decline in gross receipts.
Qualified Leave Wages and Social Security Tax Treatment
Qualified sick leave and qualified family leave wages remain exempt from the employer share of
social security tax under sections 3111(a) and 3221(a) of the Internal Revenue Code.
Employees still pay their portion of social security taxes on these amounts, and both the employer and employee shares of Medicare tax continue to apply without exemption.
Federal income tax withholding requirements remain unchanged for qualified leave wages paid under FFCRA provisions. The credit increases by the amount of the employer’s share of
Medicare tax paid on these leave wages, providing additional relief to private employers and public employers offering emergency paid sick leave.
Employee Retention Credit Eligibility Requirements for
2020
Eligibility for the Employee Retention Credit in 2020 depends on meeting one of two CARES Act criteria. One option applies when business operations are fully or partially suspended due to government orders restricting commerce, travel, or group meetings during the public health emergency.
Alternatively, employers may qualify by experiencing a decline in gross receipts of more than 50 percent compared to the same calendar quarter in 2019. Once gross receipts fall below this threshold, eligibility begins in that quarter and continues until recovery occurs.
Qualification ends in the quarter immediately following the period in which gross receipts rise above 80 percent of the corresponding 2019 quarter. A separate 20 percent gross receipts decline standard applies only to 2021 under the Tax Relief Act and does not apply to any quarter in 2020.
Credits should be reported on Form 941, specifically on
Lines 11b, 11c, 13c, and 13d
The 2020 Form 941 requires employers to report FFCRA paid leave credits and the Employee
Retention Credit on specific lines using a nonrefundable and refundable credit structure. Line
11b captures the nonrefundable portion of the credit for these leave wages, combining both types of leave into a single entry.
Line 11c reports the nonrefundable portion of the Employee Retention Credit separately from paid leave amounts. Refundable portions appear lower on the form after you calculate the total liability and deposits made during the quarter.
Line 13c shows the refundable credit for qualified sick and family leave wages when credits exceed your payroll tax liability. Line 13d captures the refundable portion of the Employee
Retention Credit when that credit surpasses available tax liability.
Employer Social Security Tax Deferral and Repayment
Schedule
The CARES Act permitted all employers to defer the deposit and payment of the employer portion of social security taxes from March 27 through December 31, 2020. This deferral provision applied only to the employer's 6.2% share of social security tax, excluding employee withholding amounts and all Medicare tax obligations.
Repayment requirements establish a two-year schedule, splitting the deferred amount into equal installments. You must deposit 50% of your total deferred employer social security taxes by
December 31, 2021, and the remaining 50% becomes due by December 31, 2022.
Wage Reporting and Tax Liability Calculations
Form 941 requires careful wage reporting that accounts for the special treatment of qualified leave wages across multiple form lines. Report all wages, including qualified sick and family leave amounts, on line 5, without deductions for leave wage exemptions.
Line 5c captures wages subject to the Social Security tax, properly accounting for the employer-share exemption for qualified leave wages. Line 5d includes all wages subject to
Medicare tax, including qualified leave wages that remain fully taxable for Medicare purposes.
Tax liability calculations must reflect both the standard payroll taxes on regular wages and the modified treatment of qualified leave wages. Multiply taxable social security wages by 12.4% to determine the combined employer and employee social security tax, then apply the 2.9%
Medicare tax rate to all salaries, including those paid under FFCRA provisions.
Documentation Requirements and Filing Deadlines
Maintain comprehensive payroll records supporting all wage calculations, credit claims, and health plan expenses allocated to qualified leave wages. Document government orders that suspended operations for Employee Retention Credit eligibility or retain gross receipts calculations comparing 2020 quarters to 2019 baseline amounts.
File Form 941 by the last day of the month following each quarter-end, or by the tenth day of the second following month if you made timely deposits covering your full tax liability. Employers who permanently close their business or stop paying wages must file a final return, checking the appropriate box and providing information about payroll record retention.
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