941 Form Instructions for Q2, 2020

1 | Number of employees who received wages, tips, or other compensation for the pay period including:

• June 12 (Quarter 2),
• Sept. 12 (Quarter 3),
• or Dec. 12 (Quarter 4)

Enter the number of employees that were paid for the pay-period that covers the 12th day of the last month of the quarter.

Number of employees in a company could fluctuate throughout the year. This number is a snapshot of employees working around a specific date in the quarter for all companies in the U.S. It is likely used to provide useful labor or employment statistics. The number excludes household employees, company employees but not paid in the period, farm employees, pensioners and active member of armed forces.

2 | Wages, tips, and other compensation

Total amount paid to all employees for wages, tips and other compensations for the 3 months.

The amount is the sum of payments to all employees. The payment to each employee is reported in the Box 1 of the W-2 for each employee. The IRS performs a critical and most basic test to verify the accuracy of your company reporting.

Sum of line 2 of the four 941 tax form = sum of Box 1 of all W2s (W-3) for the company.

Your company will receive a letter from the IRS demanding explanation if the amounts are different – guaranteed.

3 | Federal income tax withheld from wages, tips, and other compensation

Total amount of income tax withheld from all paychecks for the quarter.

This money (withheld) belongs to the employee and is reported in Box 2 of the W-2. The IRS system validate the amounts. Sum of line 3 of the four 941s = sum of Box 2 of all W2s (W-3).

4 | If no wages, tips, and other compensation are subject to social security or Medicare tax

Check the box Only if no wage, etc. from line 2 of the form is Subject to Social Security or Medicare taxes.

Certain religious organizations or government employers may be exempt from the Social Security and Medicare taxes. It is possible though unlikely that a company hires only foreign students or workers and is exempt from these taxes. Do not check the box unless your organization is exempt from these taxes.

5a | Taxable social security wages.

The total amount of wages paid to all employees that are subject to Social Security tax.

The amount is reported in box 3 of the W-2 for each employee. If your employees receive tips (restaurants, salons workers, e.g.), the reported tips are taxed like regular earnings, but are reported separately in line 5b. The taxable Social Security tips are reported in Box 7 of the W-2 form. The IRS validation is: Sum of line 5a + sum of line 5b of the four 941 tax form = sum of Box 3 + sum of Box 7 of all W2s (W-3). The amount of Social Security tax is limited each year for any one employee. Beyond a pre-defined amount, the employee (and the company) does not need to pay more Social Security tax. For tax year 2020, the maximum taxable Social Security wage is $137,000 for any one employee. Due to Covid-19, certain qualified sick and family wages are reported separately on the new form 941 from the 2nd quarter of 2020.

5a (i) | Qualified sick leave wages

Total sick leave wages paid to employees that qualify for payroll tax credits under FFCRA (Families First Coronavirus Response Act)

Subject to the qualification criteria and amount limitations of the EPSLA (Emergency Paid Sick Leave Act), enacted under FFCRA (more details at www.irs.gov), the government will pay for the qualified sick leave wages and health plan expenses, etc. for the employees The company does not need to pay the matching taxes either. It is intended to help the business or organization to retain employees. If your company or organization has paid qualified sick leave wages and did not receive PPP (Paycheck Protection Program) loan, you may qualify for the credit and our efile preparation will compute the correct credit amount through the Worksheet 1 to prepare the form 941 to include the proper credit. Make sure the criteria to qualify for sick leave credits are met. The employee and the employer may be asked to present hospital records, test results, etc. to verify the qualified sick leave wages paid by the company.

5a (ii) | Qualified family leave wages

Total family leave wages paid to employees that qualify for payroll tax credits under FFCRA (Families First Coronavirus Response Act)

Similar to the qualified sick leave wages, certain wages paid to employees for qualified family leave due to Covid-19 are credited by the Federal government. Our preparation and calculation of the proper credits are important to claiming the credits. Make sure the criteria to qualify for family leave credits are met. The employee and the employer may be asked to present State lockdown order, school closure notice, etc. to verify the qualified family leave wages paid by the company.

5b | Taxable social security tips

Total amount of tips (cash & credit card) received by employees for the quarter.

Although tips are reported separately on form 941 and W-2, the tips are taxed like regular earnings. The reason to separate the tips out from regular earnings is apparently to ensue no under-reporting of tips. For example, a restaurant with a million- dollar revenue probably would not have a total tips amount of only $10,000 (1%). It is probably unlikely that all guests are scrooges.

5c | Taxable Medicare wages & tips

Total wages that are subject to Medicare tax for all employees for the quarter

The amount is reported in box 5 on the W-2 for each employee. Sum of line 5c of the four 941 forms = sum of Box 5 of all W2s (W-3). Unlike taxable SS wage, there is no annual limit and all wages are subject to Medicare tax.

5d | Taxable wages & tips subject to Additional Medicare Tax withholding

Calculate the wage for any employee that exceeds $200,000 for the year. Enter the total of the wages for employees earning more than $200,000 for the year.

If an employee earns a very high wage ($200,000 for tax year 2020, e.g.), the employee needs to pay more Medicare tax. Basically, this is an additional Medicare tax applied to high income earners. The company needs to withhold additional Medicare tax, starting from the quarter when the employee wage exceeds the amount and continue to the end of the year.

5e | Total social security and Medicare taxes

It is the sum of all Social Security and Medicare taxes from line 5a to 5d.

The amount is the total Social Security and Medicare taxes liabilities for the company for the quarter.

5f | Section 3121(q) Notice and Demand—Tax due on unreported tips

The amount of taxes from unreported tips, demanded by the IRS.

Enter the amount of taxes Only if you received a notice (Section 3121(q)) from the IRS for taxes on under reported or unreported tips.

6 | Total taxes before adjustments. Add lines 3, 5e, and 5f

It is a mathematical sum of line 3, 5e and 5f. It is total tax amount before adjustment and credits, etc.

It is the sum of all income tax, Social Security and Medicare tax. Form 941 is used to report these 3 types of taxes. However, certain adjustments for research credits, Covid-19 related relief credits, etc. may be applicable before the final tax liability for the quarter is determined.

7 | Current quarter's adjustment for fractions of cents

Enter a small (a few cents, e.g.) negative or positive amount to adjust for rounding errors caused by tax liability calculations.

The total tax liability for the quarter is calculated in two ways. First, the liability is calculated based on the total wages, adjustment and credits for the whole quarter (line 12). Secondly, the tax liability needs to be reported for each month based on actual paychecks for a monthly depositor (Line 16). The sum of these three monthly liabilities may be different from the amount in line 12. The calculation from one total wage amount can be different from the sum of calculations from individual checks. This is called a "rounding error". The IRS validation rule requires that the tax liability calculated from the total wage to equal the sum of tax liabilities calculated from individual paychecks.

Line 12 = Line 16

The minor difference due to rounding error (typically a few cents only) is entered here either as a positive or a negative adjustment.

Line 16 is the details of "tax liabilities" for monthly or semi-weekly depositors (Schedule B). It is NOT the amount of "tax deposits". Because companies typically make tax deposits in full, some filers mistook line 16 as the amounts deposited. That would not be a problem if the deposits always equal liabilities. However, if the amounts are different (less deposits or paychecks error, e.g.) then the IRS validation fails if filer enters the actual deposit amounts instead of the liability amounts.

8 | Current quarter's adjustment for sick pay

To report the SS and Medicare taxes paid by a 3rd party payer for your company employees.

If your company uses an agent to pay sick pay, deposited employee's SS and Medicare taxes, you do not need to pay it again. A negative amount is entered here to reduce the tax liability on this form 941. Your company is still responsible for the employer's match of these taxes.

9 | Current quarter's adjustments for tips and group-term life insurance.

Enter a negative amount for Social Security and Medicare taxes from tips or employee's share of life insurance premium that CAN'T be collected for various reasons.

For example, an employee receives tips every night and the employer does not withhold taxes. The employee subsequently left. The final paycheck is not sufficient to cover all taxes for the employee, resulting in uncollected taxes. Until notified otherwise by the IRS, the employer can enter a negative amount to reduce the final tax liabilities for the quarter. The same rule applies to group-term life insurance premiums paid for "former" employees.

10 | Total taxes after adjustments. Combine lines 6 through 9.

The amount is calculated after the adjustments have been made to the liability amount in Line 6.

This amount is a mathematical calculation of amounts from line 6 to line 9. No argument or interpretation.

11a | Qualified small business payroll tax credit for increasing research activities. Attach Form 8974

Payroll tax credit for small businesses to increase research activities.

To claim the research credit, the company needs to prepare and attach the IRS form 8974.

This credit, if claimed, reduces the Covid-19 related payroll tax credits (ESPLA under FFCRA). Basically, an employer CAN'T claim the same payroll tax credits twice.

11b | Nonrefundable portion of credit for qualified sick and family leave wages from Worksheet 1

This amount is calculated from the Worksheet 1 of the new form 941 from the 2nd quarter of 2020. You should not enter an amount without working through the worksheet 1.

Worksheet 1 of the new form 941 has detailed instructions on calculating the Covid-19 related payroll tax credits. Our websites, www.eSmartpayroll.com, www.esmartpaycheck.com and www.paycheckmanager.com perform complete and accurate credit calculations based on the information you provide in lines 5a (i) and (ii), lines 19 - 20 and line 23.

To claim the credits, an employer has to pay qualified sick leave and family leave wages to employees though the employees can't work. It is intended for the employer to support the employees affected by the pandemic and could not work.

Non-refundable credits meaning the credit is applied to offset the tax liabilities. If there are not enough tax liabilities to offset the full amount of credits, the credit is effectively lost.

Refundable credit, on the other hand, is like a cash payment. If the tax liability is less than the credit, the IRS will send a refund check for the difference.

11c | Nonrefundable portion of employee retention credit from Worksheet 1

This amount is calculated from the Worksheet 1 of the new form 941 from the 2nd quarter of 2020. You should not enter an amount without working through the worksheet 1.

The employee retention is intended for the employer to continue to pay wages although the business lost more than 50% of its revenue (against the same period last year) due to the pandemic and subsequent lock down, etc.

Use our websites, eSmartpayroll.com, Paycheckmanager.com and eSmartpaycheck.com to calculate the correct credits. The employer needs to enter the amounts in lines 21-22 and lines 24 - 25.

11d | Total nonrefundable credits. Add lines 11a, 11b, and 11c.

The amount is calculated from the credits reported (calculated) in line 11a, 11b and 11c.

The amount is a mathematical calculation

12 | Total taxes after adjustments and nonrefundable credits. Subtract line 11d from line 10

The final total tax liabilities for the quarter for the company, after all the adjustments and credits have been applied.

The amount is a mathematical calculation

Since there are several payroll credit s for research, work opportunity for veterans, sick, family leave and employee retention, etc., the employer need to make sure the same payroll taxes are not claimed for different credits. It is therefore important for the employer to compare and determine the credit amounts and limits for these different credits.

For example, the employee retention credits could be more than that for the sick or family leave credits for the same employee due to different credit limits and conditions. If the company qualifies for both credits, it may be beneficial for the employer to compare the credits.

13a | Total deposits for this quarter, including overpayment applied from a prior quarter and overpayments applied from Form 941-X, 941-X (PR), 944-X, or 944-X (SP) filed in the current quarter

The total payments made by the employer for the quarter.

This is the total amount of money (payments) deposited by the employer to the IRS, including overpayment (if any) from prior quarters.

Instead of line 16, the actual amount paid by the employer is entered on this line. It is used to calculate if the employer paid in full, over or under-paid against the tax liabilities in line 12.

13b | Deferred amount of the employer share of social security tax.

For tax year 2020, an employer can defer Social Security tax and pay the deferred amounts in two installments at the end of 2021 and the end of 2022.

The employer can only defer the Social Security tax that has not been paid (deposited). If an employer has paid Social Security tax for the quarter, the form 941 will not allow the employer to defer the SS tax that has already been paid for the quarter. If an employer wants to defer the SS tax, the employer should not make the deposits as scheduled. Line 13a will thus be less than the liability in Line 12.

The Social Security tax is only "deferred" and the employer is responsible for making the two payments in 2021 and 2022.

13c | Refundable portion of credit for qualified sick and family leave wages from Worksheet 1

The amount is calculated from worksheet 1 of the new form 941.

This is a mathematical calculation.

13d | Refundable portion of employee retention credit from Worksheet 1

The amount is calculated from worksheet 1 of the new form 941.

This is a mathematical calculation.

13e | Total deposits, deferrals, and refundable credits. Add lines 13a, 13b, 13c, and 13d.

This amount is the total of actual deposits, deferrals and refundable credits - effectively money paid by the employer for the quarter.

Although the employer only made payments (deposits) in the amount reported in line 13, adding qualified, calculated refundable credits, the employer may get a refund check from the IRS.

This is a mathematical calculation.

13f | Total advances received from filing Form(s) 7200 for the quarter

If the employer has filed a form 7200 for advanced payment of credits due to Covid-19, the money received is entered here.

If the employer has filed form 7200 to claim and receive the credits, the applicable, calculated total deposits will be reduced accordingly on the form 941.

13g | Total deposits, deferrals, and refundable credits less advances. Subtract line 13f from line 13e

The amount is calculated from the actual payments, credits, deferral and advancement.

This is a mathematical calculation.

14 | Balance due. If line 12 is more than line 13g, enter the difference and see instructions.

After all adjustments, payments, credits and deferrals are applied, the company may still owe more taxes as a balance due

This is a mathematical calculation.

15 | Overpayment. If line 13g is more than line 12, enter the difference

If there is overpayment, the employer can have the overpayment applied to next return 941 or request a refund.

After the IRS accepted the form 941 (efiled or paper) and verified the accuracy and account balance, a refund check is mailed to the company if requested.

16 | Check one:

Line 12 on this return is less than $2,500 or line 12 on the return for the prior quarter was less than $2,500, and you didn't incur a $100,000 next-day deposit obligation during the current quarter.

Check this box if your company payroll is very small. The income tax withholding, Social Security and Medicare taxes total is less than $2,500 for the quarter. If the prior quarter tax total is less than $2,500 and this quarter tax total exceeds $2.500, you can still check this box if the company did not have any significant payday that incurs more than $100,000 taxes.

When this box is checked, the employer does not need to separate out individual tax amounts by deposit period (monthly, semi-weekly/Schedule B, etc).

Typically, the IRS requires tax deposits either monthly or semi-weekly (3 business days). The late payment penalty and interests are calculated by IRS system automatically if payments were not made in time. See monthly and semi-weekly deposits details below.

As an exception, the IRS will not penalize the employer if payroll taxes for the quarter (<$2,500) is deposited and the form 941 is filed before the filing deadline for the form 941. Basically, small companies with less than $2,500 tax liabilities can pay the IRS once a quarter. However, as soon as the tax amount exceeds $2,500 in any month of the quarter, the employer needs to make deposits monthly to avoid late payment penalty and interest.

You were a monthly schedule depositor for the entire quarter. Enter your tax liability for each month and total liability for the quarter, then go to Part 3.

If your company has been notified by the IRS as a "monthly depositor", you need to make tax deposits every month, even though the form 941 return is only required once a quarter.

"Monthly depositor" means the employer needs to deposit all income tax withheld, Social Security and Medicare taxes before the 15th of each month for all paychecks issued in the prior month.

Tax liability:

• Month 1.
• Month 2.
• Month 3.
• Total liability for quarter

You are required to report the total monthly tax liabilities for all of the checks issued in the month. You are self-reporting how much taxes are due to the IRS for each of the 3 months of the quarter.

For example, an employer issued paychecks every week (at company's discretion, any pay cycle) in June, all of the taxes from all of the paychecks need to be paid to the IRS before the 15th of July - thus the monthly depositor.

When this box is checked, the employer needs to report tax liabilities for each of the 3 months in the quarter.

The IRS uses the amounts and months you reported here, check against the actual money deposited to the IRS to determine if your payment is complete or late. The calculation of late payment penalty and interest are automatic - based on what you reported.

You were a semiweekly schedule depositor for any part of this quarter.

Check the box if you have been notified by the IRS to be a "semi-weekly depositor", meaning your company is required to deposit payroll taxes within 3 business days of issuing paychecks. For a semi-weekly depositor, the company needs to prepare a Schedule B, basically self-reporting the tax liabilities from each pay period (money is due in 3 business days).

The IRS typically sends a notice to the employer to clarify the deposit schedule for the company.

A new company always starts as a "monthly depositor". "Monthly deposit" is typical for small business with more than $2,500 but less than $50,000 payroll taxes for the quarter. When the company grows and the payroll taxes exceeds $50,000 for the quarter, the company probably needs to deposit the payroll taxes within 3 days of issue paychecks. The IRS has a look-back period (6 quarters earlier, e.g.) to automatically review the payroll taxes history for a company to determine if the company needs to deposit more frequently (semiweekly, e.g.).

One of the most common reasons for a company to be penalized for late payroll tax payment and interests is that the company grows and become a "semi-weekly depositor" but still make deposits" monthly". It is the employer's responsibility to be aware of the semi-weekly deposit requirement, even if the employer is not notified.

The IRS will require a Schedule B then use the liabilities you reported for each pay period and paydate to calculate late penalty and interest.

17 | If your business has closed or you stopped paying wages.

Check the box if the business is closed.

If the box is not checked and no further 941 report is filed, the IRS will send a letter demanding the form 941 for future quarters.

18 | If you're a seasonal employer and you don't have to file a return for every quarter of the year

Check the box if your company hires only seasonal employees.

If the box not checked and the company does not file a future 941 (can be $0 wage), the IRS will send a letter to request the form 941.

19 | Qualified health plan expenses allocable to qualified sick leave wages

Enter the health plan expenses (premium, etc.) allocable to the qualified sick leave wage that is claimed in line 5a(i)

Lines 19-25 are information required for calculation of payroll credits related to the pandemic relief.

In addition to credits for employer to pay sick leave wages, the cost to provide health insurance may also be credited. The qualified health plan expenses is not simply the actual money paid for the employee insurance, refer to detailed explanation and calculations published by the IRS, www.irs.gov.

20 | Qualified health plan expenses allocable to qualified family leave wages

Enter the health plan expenses (premium, etc.) allocable to the qualified family leave wage that is claimed in line 5a(ii)

Similar to the qualified health plan expenses for the qualified sick leave wages, additional credits are applicable for health plan expenses for qualified family leave wages.

21 | Qualified wages for the employee retention credit.

Enter the wages paid to employees if the business revenue has dropped to less than 50% of the revenue from the compare period in 2019.

The employee retention credits are available to the end of 2020 or until the revenue reaches 80% of the revenue of the comparable period from 2019.

22 | Qualified health plan expenses allocable to wages reported on line 21

Enter the health plan expenses (premium, etc.) allocable to the qualified wages for employee retention credits that is claimed in line 21.

23 | Credit from Form 5884-C, line 11, for this quarter

For certain exempt organization, payroll tax credits can be claimed with form 5884-C for work opportunity provided to qualified veterans.

The credit is applicable to certain exempt organization that hires qualified veterans and the government helps pay for wages for a certain period of time. Make sure the same payroll tax credits are not claimed for ESLPA credits also. Our website, www.eSmartpayroll.com etc. will prepare worksheet 1 to calculate appropriate credits applicable to the form 941.

24 | Qualified wages paid March 13 through March 31, 2020, for the employee retention credit (use this line only for the second quarter filing of Form 941)

Only applicable to the last weeks in March 2020, enter the qualified wages for employee retention credit.

Since the lockdown was started sometime in March 2020, the wages paid to retain employees although the business was shut down by the order of the government. Additional credits were provided for the last weeks of March 2020, reported on the end quarter form 941.

25 | Qualified health plan expenses allocable to wages reported on line 24 (use this line only for the second quarter filing of Form 941).

Enter the allocable health plan expenses to wages reported on line 24 (qualified wages for employee retention credits from the last two weeks of March 2020)

Line 24 and line 25 are specifically added to accommodate the last weeks of March 2020, applicable to the 2nd quarter form 941 only. The lines will not be used for future form 941s.

Do you want to allow an employee, a paid tax preparer, or another person to discuss this return with the IRS? See the instructions for details.

Check box to allow a designated person to talk to the IRS regarding the form 941s.

The 3rd party can be a tax professional providing payroll service to the company, etc. If designated, this person will be able to discuss the issues regarding the form 941 with the IRS. The authorization person from the employer can also discuss with the IRS on issues related to the form 941.

Yes. Designee’s name and phone number

The 3rd party designee’s name and phone number

Identity of the 3rd party designee.

Select a 5-digit personal identification number (PIN) to use when talking to the IRS.

Enter any self-selected 5 digits as a personal identification if you are the 3rd party designee

It is the Personal Identification Number (PIN) for the 3rd party designee

PTIN

A tax professional can apply a Preparer Tax Identification (PTIN) when preparing tax returns for clients.

This is applied from the IRS so the tax professional does not need to use his/her own SSN for identification when preparing tax returns for clients.

EIN

Employer Identification Number (EIN), applied by a business or an employer from the IRS. An account that all payroll returns and tax payments, etc. are reconciled for the entity.

If the tax professional (paid preparer, e.g.) works for a company, instead of PTIN, the preparer should enter the EIN (employer Identification Number) for the firm he/she works for.