Almost all businesses felt the negative financial effects of the COVID-19 pandemic, making it extremely difficult to retain employees. To help alleviate this issue the Employee Retention Credit(ERC) was created. This credit is intended to encourage employers to keep employees on their payroll by offering them a refundable tax credit based on qualified wages paid to employees.
Many employers assume that only for profit businesses are able to take advantage of the ERC, but this could not be further from the truth. Nonprofits can also qualify for the ERC.
What Types of Nonprofits Are Eligible for ERC?
All types of nonprofits are eligible to receive the ERC, as long as they meet one of the following two conditions. The first way to qualify is if the nonprofit experienced partial or fully suspended operations due to orders from a governmental authority to limit commerce, travel, or group meetings due to COVID-19.
The second way for a nonprofit to qualify for the ERC is by passing the Gross Receipts Test. This test compares gross receipts during the pandemic to those from 2019, with the intention of seeing if there was a marked difference between the two. If gross receipts from 2020 saw a decrease of 50% when compared to gross receipts from the same calendar quarter in 2019, then the nonprofit qualifies for the ERC. The test is much the same for 2021, with the difference being that a decrease of only 20% is required to qualify.
It is important to be clear that an organization must only meet one of the above conditions to qualify to receive the ERC. If your organization is eligible, it is paramount that you apply to receive the ERC before the impending deadline.
ERC for Churches
Churches and religious organizations are also eligible to receive the ERC. To qualify, churches are required to meet the same conditions as other nonprofit organizations (as detailed above). Churches may also qualify for enhanced benefits based on how many employees they have. In regards to the 2020 ERC, religious organizations are entitled to maximum benefits available under the ERC calculations if they have 100 or fewer full-time employees. For the 2021 ERC, the requirement to receive maximum benefits was relaxed, requiring 500 or fewer full-time employees.
Are Tax-Exempt Organizations (TEOs) Eligible for ERC?
In most cases, tax-exempt organizations (TEOs) are not eligible for federal tax credits, as they are not required to pay federal income tax. This is not the case when it comes to the ERC, which TEOs are in fact eligible for. The ERC is taken against employment taxes, differing from most tax credits which are taken against income tax.
Calculating Qualified Wages
Calculating how much you are eligible for under the ERC is a relatively simple and straightforward process. The calculation will be different depending on whether you are calculating qualified wages from 2020 or 2021. For 2020 your credit will be 50% of qualified wages paid to each employee, with qualified wages being limited to $10,000 per employee. For 2021 your credit will be 70% of qualified wages paid to each employee, with qualified wages being limited to $10,000 per employee, per quarter. The fourth quarter of 2021 is not currently eligible for the ERC. Whether calculating for 2020 or 2021, qualified wages paid must include employer paid healthcare.
Eligibility for Nonprofits That Received PPP Loans
The Paycheck Protection Program (PPP) was implemented in 2020 to offer aid to businesses struggling financially as a result of the pandemic. The PPP was designed to prevent unemployment by allowing businesses to apply for low-interest private loans to cover payroll costs.
You may have heard that nonprofits who have received PPP loans are not eligible for the ERC. When the ERC was first introduced as part of the CARES act, any and all organizations that received a PPP loan were automatically ineligible to receive the ERC. However, this is no longer true, as in December 2020 the prohibition against PPP recipients claiming ERC benefits was repealed. This means that nonprofits that received PPP loans are now eligible to receive ERC benefits.
If your nonprofit qualifies for the ERC tax credit, speak with an ERC consultant to help you complete and submit your application to the IRS. An ERC consultant is typically an experienced tax consultant or tax attorney who understands how to navigate dealing with the IRS. This can help you receive your ERC tax credit sooner, even with delays at the IRS due to a surplus amount of applications submitted.
Five Star ERC Experts consists of a team of tax consultants and certified tax attorneys who are ready to help you complete your application. They can get you in line with the IRS faster, so you are one step closer to receiving your tax credit or refund.