The Employee Retention Credit (ERC) is a refundable payroll tax credit that your tax-exempt organization may be eligible for.
The credit was originally enacted with the CARES Act in March of 2020 and was extended and expanded with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which passed in December 2020. An additional extension of the credit was granted through the signing of The American Rescue Plan Act of 2021 on March 11, 2021.
The ERC is a fully refundable credit for qualified wages paid after March 13, 2020, until December 31, 2021. Having operations suspended or experiencing a significant decline in gross receipts will determine eligibility, while amounts paid to employees during specific calendar quarters will determine the credit amount.
Employee Retention Credit Nonprofit Qualifications
One major aspect of ERC that is overlooked is that a wide variety of organizations carrying out a trade or business are eligible. This includes tax-exempt organizations described in section 501(c) of the Internal Revenue Code, along with typical private-sector for-profit businesses. Governmental entities however are ineligible for this credit.
Tax-exempt organizations who want to claim this credit must meet one of the following qualifications:
- Employers whose operations have been fully or partially suspended as the result of a government order related to COVID-19. Only wages for the period of suspension qualify.
- Employers whose business experienced a significant decline in gross receipts. For 2020, a significant decline in gross receipts is when gross receipts in a 2020 calendar quarter are less than 50% of the same quarter in 2019. The employer is eligible the first day of the quarter it meets this test. The employer is no longer eligible on the first day of the quarter following the quarter when gross receipts are more than 80% of its receipts for the same quarter in 2019.
- For 2021, an organization is experiencing a significant decline in gross receipts if gross receipts for the quarter are less than 80% of the same quarter in 2019. Employers may also elect to use the immediately previous quarter as well for 2021.
Amount of Employee Retention Credit
For eligible employers, the amount of the credit differs between 2020 and 2021.
For amounts paid between March 13, 2020, and December 31, 2020, the credit is equal to 50 percent of qualified wages up to a maximum of $10,000 of wages per employee for the year; equaling a maximum credit of $5,000 per employee for 2020.
For amounts paid between January 1, 2021, and December 31, 2021, the credit is equal to 70 percent of qualified wages up to a maximum of $10,000 of wages per employee, per quarter; equaling a maximum credit of $28,000 per employee for 2021.
Employee Retention Credit Nonprofit Qualified Wages
Since the credit is based on qualified wages, it is important to understand what is considered qualified wages. Qualified wages are certain wages paid to employees, including healthcare costs, during the periods described above.
To see which wages are considered qualified wages, an organization must determine if they are a large or small employer, which is based on the number of average full-time employees.
For 2020, an organization is considered a small employer if they have 100 or fewer full-time employees, for 2021 that amount is increased to 500 or fewer full-time employees. Organizations with full-time employees over those amounts are considered large employers.
For small employers, wages paid to all employees are qualified wages, whether those employees provide services or not.
For large employers, qualified wages only include wages paid to employees that are not providing services to the employer.
Interaction with Paycheck Protection Program (PPP)
The credit was not only extended but expanded with the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
A major change was the ability of organizations who received a Paycheck Protection Program (PPP) loan to also take advantage of the ERC. Initially, according to the CARES Act, organizations that received PPP loans were ineligible for the ERC, but this restriction no longer exists. While organizations who received PPP loans are now eligible for the ERC credit, only wages not included in the PPP loan forgiveness calculation are eligible.
How to Claim the Credit
The credit is claimed for each calendar quarter on the federal employment tax returns, usually the Form 941, Employer’s Quarterly Federal Tax Return.
If you are claiming the credit for 2020, you must file Form 941-X to amend the payroll return and request a refund for the credit. This must be done within three years from the original date the Form 941 was filed.
For credits in 2021, your organization may offset federal deposit requirements by the amount of the anticipated credit. In addition, if you are a small employer for 2021, you may file to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
For each of these circumstances, a reconciliation will be completed on the filed Form 941 to determine any additional refund or amount due.
If you have any questions about the Employee Retention Credit nonprofit qualifications, please contact your Aliign team.