Employers claiming employee retention or paid leave tax credits on quarterly federal tax returns should take care to avoid common mistakes, the IRS advises.

The federal Coronavirus Aid, Relief, and Economic Security Act created an employee retention tax credit for employers impacted by the COVID-19 pandemic.

The refundable credit represents 50% of up to $10,000 in wages paid by an eligible employer whose business is financially impacted by COVID-19.

The refundable tax credit is available to all employers regardless of size, including tax-exempt organizations, with two exceptions—state and local governments and employers that accept small business loans.

The Families First Coronavirus Response Act provides small and midsize employers (fewer than 500 employees) refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave to their employees for leave related to COVID-19 between April 1, 2020, and Dec. 31, 2020.

Employers claiming tax credits for the cost of providing paid sick and family leave must retain Form 941 Employer's Quarterly Federal Tax ReturnForm 7200 Advance of Employer Credits Due to COVID-19, and any other applicable filings made to the IRS requesting the credit.

Employers filing Form 941 should know that mistakes can result in a processing delay or a balance due notice, which could require filing an amended return.

The IRS advises employers to use a reputable tax preparer, including certified public accountants, enrolled agents, or other knowledgeable tax professionals to avoid errors.

Common Mistakes

Here are some common mistakes to avoid when completing Form 941:

  • Reporting advances requested instead of the advance payments of credits received. If the employer hasn’t received the advance payment of credit they requested, it should not be reported.
  • Incorrectly reconciling the advance payment of the credit requested and received. If an employer has received the advance payment requested, they must reconcile it on the form by reporting the advance payments received on line 13f and claiming the credits they’re eligible for on lines 11b, 11c, 13c and 13d.

Forms

Form 7200 is used to request the advance payment of employer credit. It is not used to claim the credit.

If an employer receives an advance payment of credit, but doesn’t report it on Form 941, they may receive a balance due notice. 

A taxpayer who receives a balance due notice, will need to file an amended return using Form 941-X to report the advance payments and claim eligible credits.

Employers using third-party payers or reporting agents must tell their third-party payer or agent they requested and received an advance payment of credit.

The third-party payers and reporting agents should also ask employers if they requested and received an advance payment of credit using Form 7200.