941-X - Simplest Procedure to add ERC (Employee Retention Credit)

Michael Toney Updated by Michael Toney

The IRS instituted a processing moratorium on new ERC claims beginning Sept. 14, 2023. See https://www.irs.gov/coronavirus/employee-retention-credit

These are instructions for correcting Form 941 (on Form 941-X), when the only correction needed is to add missing ERTC (Employee Retention Tax Credit), also referred to as ERC (Employee Retention Credit).

What Programs are needed?

  • Payroll System’s Payroll Corrector program which includes Form 941-X (preferably the same year’s version as the 941 being corrected). 
Although Payroll Corrector is capable of correcting the immediately preceding year’s 941, the 941-X would then be saved in the “wrong” year. For instance, if 2022 Payroll Corrector is used to correct a 2021 941, then that 941-X will be saved in 2022 Payroll System.
  • Payroll System's 941/940 program (also called “After-the-Fact” payroll). Note to LivePayroll users: 941/940 is included in LivePayroll.
To calculate the ERC, and import 941 data easily (to Columns 1 & 2 of the 941-X), the 941 data must be present in Payroll System’s 941/940 program. Simple instructions will be given below for you to create a corrected 941 (in addition to your original), which you will then import to the 941-X.

If the user does not already own 941/940 software, the 2020 and 2021 941/940 programs can be purchased for $50 per year.

Purchase Notes:

  • 2020 and 2021 Payroll Corrector can only be purchased by calling CFS Customer Service at (800) 343-1157.
  • 2020 and 2021 941/940 can only be purchased by calling CFS Customer Service at (800) 343-1157.   

OVERVIEW

If the employer did not include Retention Credit Wages (“ERC”) on their original 941, and they wish to amend/correct the 941 to include ERC via 941-X in Payroll System’s Payroll Corrector Program, the following is a simple procedure.

This procedure assumes the user did NOT utilize the Payroll Column (C19-RC) in the Payroll Grid during the Quarter.
This procedure also assumes that the wages were already included on the original 941, but they were not classified as “Retention Credit Wages” (in other words, no entry was made on Line 21 of the 941).

To begin, it is assumed your 941 as originally filed has already been created and saved in Payroll System. If not, you will need to create it. We will use a 2021 example since this is the most common year for ERC corrections.

Note that we cannot give any tax advice as to whether your ERC wages qualify, how they might be effected by any PPP loan forgiveness, or as to any statute of limitations on filing the 941-X. The filer is always responsible for all content on forms submitted, and we always recommend a careful review of the results before filing. 

Step-by-Step Procedure within Payroll System 2021

  1. If the original Form 941 does not already exist in Payroll System 2021, you will need to create it and Save (with a recognizable name such as “941 2 Qtr Original”).
  2. Open the (already saved) original 941. From MENU items above, select File > “Save File As”—and give this copy a title which includes the word CORRECTED (such as “941 2 Qtr CORRECTED”):
    Note that you will ignore the “New File” option.
  3. It is assumed that this 941 has all the original 941 figures, which did not include a Line 21 entry for ERC wages.
  • Page down to page 3 of Form 941, where you will enter the Qualified ERC wages manually on the Line entitled, “Qualified Wages for the Employee Retention Credit.” This is Line 21 on all versions of 2021 Forms 941.
In the 2nd Quarter of 2020, there are 2 line options: Line 21 or Line 24.
  • If you have any related qualified health insurance expenses to add on the line just below, keep in mind that the $10,000 wage limit (per employee) INCLUDES any health insurance cost.
  1. The program module will COMPUTE the Retention Credit for you (you’ll notice that the balance due or refund amount will have changed on the 941). Be sure to SAVE this corrected version. Note: it is only for IMPORT to Column 1 of the 941-X; you will not file this “Corrected” 941.
  2. With the Corrected Form 941 still open (or upon opening it), the Covid Worksheet can be found, examined and printed, if desired. From the MENU items above, select Schedule/Attachments > “Covid-19 Credit Worksheet”:
Any Covid-19 Worksheet could be chosen, and then Page Up or Down (within Worksheets) to find the appropriate Worksheet.

For 1st Quarter 2021, only one Worksheet was utilized, and in the example above, Worksheet 2 is for ERC for the 2nd Quarter of 2021, and Worksheet 4 is for the 3rd or 4th Quarter ’s ERC.

Neither the COVID-19 Credit Worksheet, nor the corrected Form 941 we’ve just created and saved, are to be attached to the 941-X. They are only for your own records.

The COVID-19 Credit Worksheet breaks the ERC up into Refundable and Non-Refundable portions, which have flowed onto the appropriate lines of the corrected Form 941.

  1. After saving your corrected Form 941, close it and open Form 941-X:
  1. On the 941-X, select “New File” and give it a title that makes sense to you. On the first page of the 941-X, fill-in or checkbox “941” as well as the Quarter and the Year (before figures will import).
  2. Before filing, you also will need to complete any other information required on the 941-X manually (particularly on the first and last pages of Form 941-X).
  3. To Import figures, page down to Page 2 of 941-X. From Menu items above, select Import > ”Import Column 1 (from 2021; proceed to see options)”:
  1. From pop-ups, choose Form 941, then the name of the CORRECTED file you created, and indicate whether or not you need to amend Schedule B (for Semi-Monthly or Next-Day depositors). Your Corrected 941 figures should now show in the first column of the 941-X.
  2. Again from the Menu item above, select: Import > ”Import Column 2 (from Originally reported Form 941).”
  3. From pop-ups, choose Form 941 and then the name of the ORIGINAL file you created. Both columns should now be imported.
  4. Review the results, and again be sure to fill out any other required entries on the Form 941-X, including explanations of your changes.
When you PRINT Form 941-X, lines where there were no changes between columns 1 & 2 will not print. That is to be expected.

941-X Line 27

You may notice there is no, “Total Deposits for this Quarter” line. The IRS considers payment(s) independently from the form (based on what they’ve actually received). The 941-X Line 27 will have the credit (or balance due) amount that reflects the difference between the Original and Corrected 941 data (the actual payroll tax liability, as adjusted by tax credits such as the ERC, but not considering any deposits or payments that have been made).

If you utilize the Cover Letter module, the same amount will be reflected there. You can manually adjust the amount as needed, based upon the taxpayer’s prior payments (or lack thereof). For example: Original 941 reflected tax liability of $1200, and $1200 in tax deposits made. It was discovered that the taxpayer neglected to pay a $400 deposit (only $800 in deposits were made). 

They are now filing a 941-X for the same quarter, to rightfully claim ERC of $500. The cover letter for the 941-X will show a $500 overpayment. The Practitioner can change the overpayment amount to $100 ($500 ERC less the $400 that is still owed on the 941).

Form 941-X is presently only a Mail-In form for years 2020 and 2021. The mailing address may be found in the IRS 941-X instructions. You might also find the mailing address by utilizing Payroll System’s “Cover Letter” module (after selecting Form 941-X from the drop-down list (found at the top of the 2nd page of the Cover Letter module).

Since corrections are often for a prior year, addresses should be verified by checking the most current IRS 941-X version instructions. Also be sure to check IRS instructions if a special mailing address might apply (such as for an exempt organization, PDS mailing, etc). We’re aware of no mailing address changes since 2020/2021 as of the date of writing this Knowledge Base article on 6-28-22.

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