By Mark Landrigan, CPA
Nonprofit churches, schools, colleges, camps and ministries are among those who could benefit from a payroll tax credit that offers financial relief during the coronavirus pandemic.
Here is an overview of the federal Employee Retention Credit, its eligibility requirements, and how to claim the credit.
What is the ERC?
The Employee Retention Credit (ERC) is a fully refundable tax credit for eligible employers. It was initially created by the 2020 CARES Act to encourage businesses to keep employees on their payroll during widespread business interruptions caused by the pandemic.
Originally, the ERC was unavailable to employers who received Paycheck Protection Program (PPP) loans. Subsequently, Congress expanded ERC eligibility in the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The act was part of a larger COVID-19 relief bill, the Consolidated Appropriations Act of 2021, which became law on December 27, 2020.
The Tax Relief Act of 2020 makes the ERC available to employers who received PPP loans, as long as non-PPP funds are used to calculate the credit. The act also extended the employee retention tax credit through June 30, 2021. Subsequently, the American Rescue Plan Act of 2021 extended the ERC through December 31, 2021.
Eligible organizations can receive a tax credit of up to $5,000 per qualified employee in 2020 and up to $28,000 per qualified employee in 2021. This tax credit cannot be claimed for pastors and clergy, because they are exempt from the federal employment taxes (FICA), upon which the credit is based.
Organizations with more than 100 employees may claim the ERC in 2020 only for wages paid to employees who were not working. The Tax Relief Act raised this threshold to 500 employees in 2021. Therefore, employers with fewer than 500 workers can claim the credit in 2021 for wages paid to all employees.
Who is an eligible employer?
Eligible employers include businesses and tax-exempt organizations that experienced EITHER ONE of these situations:
- They at least partially suspended operations between March 13, 2020, and December 31, 2021, because of a government order limiting commerce, travel, or group meetings due to COVID-19.
- They experienced a significant decline in gross receipts in any calendar quarter, compared to the same quarter in 2019. For tax-exempt organizations, “gross receipts” would be the amount typically reported on IRS Form 990.
The Tax Relief Act modified the ERC significantly, making the credit more widely available in 2021. The chart below shows the ERC credit requirements in 2020 versus 2021.
Be sure to read this updated guidance from the IRS about claiming the ERC. You may also wish to review the IRS FAQs: Employee Retention Credit under the CARES Act. Check the IRS FAQs regularly to see the latest updates.
What wages may be used to calculate the ERC?
Employers may include up to $10,000 in qualified wages paid to non-clergy employees during the time period for which the credit is being claimed. Employer health plan costs can be included in ERC calculations for each eligible employee.
The following wages may not be included in ERC calculations:
- Emergency paid sick leave funded by the Family First Coronavirus Response Act.
- Leave taken under the Emergency Family Medical Leave Extension Act
- Employer payroll expenses covered by forgivable PPP funds
- Qualified disaster relief payments
How does an eligible employer claim the ERC?
There are three ways employers can claim the ERC:
- Reduce tax deposits. Employers who are eligible to claim the ERC in 2021 can immediately begin reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the available credit.
- Seek advance payment. If employment tax deposits are not sufficient to cover the 2021 credit, employers with an average of 500 or fewer full-time employees in 2019 may seek an advance payment from the IRS. This can be done by submitting IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19. In 2021, advances are not available for employers larger than this.
- Claim the credit retroactively. Employers can claim the COVID-19 tax credit for 2020 or 2021 by reporting their total qualified wages and the related health insurance costs of each applicable quarter on their quarterly federal tax return, IRS Form 941. If quarterly tax returns have already been filed for the affected time periods, employers can use IRS Form 941-X to claim the ERC retroactively.
Ministries who believe they qualify for the ERC are strongly encouraged to consult a local attorney or tax advisor to ensure eligibility before claiming the Employee Retention Credit.
Mark Landrigan, CPA is Assistant Vice President for MinistryWorks® By Brotherhood Mutual. MinistryWorks is a ministry-focused payroll provider specializing in church payroll, saving ministries both time and money.