Non-profit organizations, are you aware of the Employee Retention Credit (ERC)? This is a significant tax credit designed to help businesses, including non-profits, keep their employees on payroll during challenging economic times.
The ERC could be a lifeline for your organization, providing financial relief that directly impacts your ability to retain your staff. It’s not just about the numbers; it’s about the people who make your mission possible.
Imagine the stability and continuity you could provide to your team, not to mention the positive impact on your organization’s morale. By taking advantage of the ERC, you’re investing in your team and enhancing your mission, while ensuring your organization’s sustainability.
Don’t miss out on this opportunity! It’s time to dive deeper into the details of the ERC, understand its benefits, and learn how to leverage it for your non-profit organization. Let’s explore together how the ERC can be a game-changer for your non-profit.
Remember, every step taken towards employee retention is a step towards a stronger, more resilient organization. Let the journey begin!
Overview
The employee retention credit (ERC) is a refundable tax credit which was established by the 2020 CARES Act to help eligible employers retain employees during the COVID-19 crisis.
The ERC is provided for in Section 2301 of the CARES Act and is designed to help employers, and non-profits can claim and receive this credit as well.
The ERC provided for in the CARES Act is contingent on an employer being enabled to show that their operations were entirely or partially suspended by government order in the wake of COVID-19, or that the employer has suffered a significant decline in its gross receipts because of COVID-19.
In addition, the employer must maintain a full-time average employee headcount from 2019 through to the end of the covered period (which has been extended to 31 December, 2020).
The maximum amount of the credit in respect of each employee (including non-resident alien employees) is the ‘applicable percentage’ of the ‘qualified wages’ (including the employer’s qualified health plan expenses) paid to each employee.
Thus, a non-profit organization has several main reasons for which to take advantage of the Employee Retention Credit. First, the ERC can be added to the general non-profit tax-exempt status.
That is, any wages reported on a form 990 are exempted from Medicare taxes under section 3121R of the Internal Revenue Code. However, the ERC is not defined within this part of the code and it is a rarely used credit.
This suggests that non-profit tax professionals must have the ERC in mind when advising and working with non-profit organizations – the complexity of the credit requires careful consideration.
Second, the definition of ‘qualified wages’ incorporates the employer’s qualified health plan expenses, and it is provided that such expenses are then included for ‘all purposes of section 106’. Section 106 refers to the exclusion of benefits provided to employees from gross income, meaning that the health plan expenses associated with the ERC can be further utilized by the employees.
Lastly, the ERC is a ‘refundable’ tax credit which means that the employer can claim it and the IRS will refund any balance of the credit that remains, even if the employer does not owe any federal employment taxes.
By its breadth and applicability, a wide variety of non-profit organizations across disciplines can qualify for and benefit from the ERC.
However, there are some exclusions provided for in the credit which ease the administrative load on the IRS – not all non-profit organizations will be eligible to claim it.
These are outlined in section 3121R of the Internal Revenue Code and basically provide that certain non-profit organizations cannot claim the credit.
For example, non-profits who run trade or business that is not substantially related to the relevant non-profit purpose.
The substance of the relevant non-profit’s purpose can be understood by reference to section 501C3 of the IRC, which provides relief from federal income tax, and will encompass excluding tax from all contributions made to the organization and other ancillary benefits.
However, if a non-profit operates a trade or business not substantially related to this purpose and gross receipts constitute more than 20% of the total, then it cannot claim the ERC. This section contains a big definition of what constitutes a trade or business and is a key part of the weight and lay out of the ERC.
However, for bona fide non-profit organizations, the chance to fully utilize the credit will go a long way to being able to support and maintain employees through the COVID-19 crisis.
Purpose of the Employee Retention Credit
Before delving into the benefits that nonprofits can gain from this credit, it’s essential to have a fundamental understanding of what the Employee Retention Credit aims to achieve.
Overall, the Employee Retention Credit is designed to encourage employers to keep paying their employees, despite the obvious economic challenges posed by the global pandemic. However, in order to gain a credit, employers must fall into a certain category.
For the purposes of this guide, we will be looking at the possibilities surrounding the release of a credit to eligible non-profit organizations.
Specifically, attention will be paid to section 2301 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which first introduced the credit to the tax legislation.
This makes particular reference to subsection (c) (1) (A), and the rules and regulations surrounding the claim of the credit by non-profit making entities.
Eligibility Criteria for Non-profit Organizations
To qualify for the Employee Retention Credit, a non-profit organization must satisfy the following conditions:
First, during the calendar year 2020, the operations of the non-profit organization must have been fully or partially suspended as a result of orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
Generally, non-profit organizations meet this condition if they were forced to fully or partially close due to a government order. Secondly, the non-profit organization must have experienced a significant decline in “gross receipts” during a calendar quarter in 2020.
Under the CARES Act, a non-profit organization is treated as having a significant decline in gross receipts if its gross receipts for a calendar quarter in 2020 are less than 50 percent of the gross receipts for the same calendar quarter in 2019.
However, once a non-profit organization satisfies the significant decline in gross receipts test for a calendar quarter in 2020, such organization does not need to apply the test for any subsequent calendar quarter in 2020.
Finally, the non-profit organization must not have received a Paycheck Protection loan. As explained above, the non-profit organization is required to examine only the eligibility criteria that are applicable to the calendar quarters in which it is seeking the credit.
Consequently, a non-profit organization may be eligible to claim the Employee Retention Credit for some quarters in 2020 but not for other quarters, depending on the organization’s specific circumstances.
However, if a non-profit organization sponsors more than one activity, the organization must use a “reasonable method” to allocate any differences in “qualified wages” among its activities.
Also, the regulations provide methods by which an eligible employer may amend employment tax returns to claim the Employee Retention Credit.
Despite the uncertainty that non-profit organizations face regarding the duration of the pandemic and its impact on their activities, the Employee Retention Credit provides a ray of hope to these organizations as they continue to serve our communities.
Through this credit, eligible employers can get financial relief to continue their operations and retain their employees.
Benefits of the Employee Retention
The ERC has been around for a while, however it had never been available for tax-exempt organizations.
Therefore, this is the very first time in the tax law. It is available to any tax-exempt entity that carries on a trade or business, whether it is a Section 501(c) organization or a Section 115 governmental entity.
Believe it or not, there are a lot of smaller nonprofits out there who have never applied for any of these federal assistance programs in the past, and in many cases, all of the employees were furloughed without pay.
Even as our society continues to open back up and there are safe ways to deliver products and services, those smaller organizations are going to struggle to bring those employees back and ramp back up.
Because of the guidance that has been put out, those non-profits now know that this credit is available and has the flexibility to help them bring their employees back now and ramp back up as the situation allows.
Also, this credit is through December 2021, rather than the end of the calendar year, so non-profits have time to use this credit this year and also next year as they ramp back up. So, it’s helpful for relieving a cash flow squeeze.
And finally, because the credit is available to offset not only the Medicare taxes owed on wages but also is refundable to non-profit employers, it results in much greater benefits than any prior relief programs that have been available.
So, for non-profits that have never used the payroll credit or any of the payroll tax deferral programs and some of the businesses that are helped by the primary credit programs, this is the first time that the non-profits have actually been available to refund the employers.
Understanding the Employee Retention Credit
First, the employer’s operations must be fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel or group meetings.
The second condition is that during any calendar quarter, the employer’s gross receipts are less than 80 percent of the gross receipts for the same calendar quarter in 2019.
However, once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter. In the calculation of the gross receipts reduction, all gross receipts are taken into account.
It does not matter whether the employer is a tax-exempt entity under Section 501(c) of the Internal Revenue Code.
The term “gross receipts” has the same meaning as in Section 6033 of the Code and the regulations thereunder. For tax-exempt organizations, the operation or partial suspension need not be as a result of governmental order.
Any calendar quarter in 2020 where the gross receipts are less than 80 percent of the gross receipts of the corresponding calendar quarter in 2019 qualifies for the credit. The entire calendar quarter may be as a result of this gross receipts reduction.
On the contrary, for-profit entities can only use the first and second quarter to qualify due to gross receipts reduction. It does not matter whether the organization is on the cash or accrual accounting method.
The gross receipts reduction is determined by comparing the gross receipts in a calendar quarter of 2020 to the same calendar quarter in 2019.
The regulations provide some flexibility in determining the gross receipts reduction. For tax-exempt organizations, the operation or partial suspension need not be as a result of governmental order.
The Employee Retention
Credit is a fully refundable tax credit for employers equal to 50 percent of
the qualified wages that a qualifying employer pays to an employee. This credit
is designed to encourage employers to keep employees on their payroll.
An employer, including a non-profit organization, is a qualifying employer if the employer meets the following two conditions.
The employer’s operations must be fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings.
During any calendar quarter, the employer’s gross receipts are less than 80 percent of the gross receipts for the same calendar quarter in 2019.
The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Definition and Overview of the Employee Retention Credit
As the employee retention tax credit is related to the federal payroll taxes and not the federal income taxes, all not-for-profit organizations should engage their finance leaders, tax advisors and legal advisors to understand eligibility and compliance to ensure this benefit is claimed successfully.
Per the latest IRS guidance on the CARES Act, Qualifying Not-for-Profit Employers can access liquidity through cash refunds for the employee retention credit, a refundable
tax credit.
That is, any advanced payment of the employee retention credit for a relevant quarter will be settled and paid to the employer from any deposits of federal payroll taxes on record with the IRS. ‘
There is additional funding that can be obtained through an advance credit by filing form 7200, which is the Advance Payment of Employer Credits Due to COVID-19.
A Qualifying Not-for-Profit Employers (organizations described in section 501(c)) are eligible for the employee retention tax credit.
A Qualifying Not-for-Profit Employers should also keep in mind that: only the wages qualifying as section 3121(a) or (b) wages are considered; wages paid to all employees are considered, not just those who are or were on leave; and, the employee retention tax cannot be claimed on wages paid through the PPP.
An eligible employer is any employer that carries on a trade or business during calendar year 2020, including tax-exempt organizations, that either fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 or experiences a significant decline in gross receipts during the calendar
quarter.
However, governmental employers and self-employment income of any individual are not considered as eligible wages.
The Employee Retention
Credit is a fully refundable tax credit created by the CARES Act. The Employee
Retention Credit is designed to encourage employers to keep employees on their
payroll.
The refundable tax credit is 50% of up to $10,000 in qualified wages paid to an employee by an eligible employer. This credit can be claimed by eligible employers against the employer portion of Social Security taxes throughout the year. If the employer’s tax liability is less than the credit, the employer can receive the remaining refund as an advance from the IRS.
Calculation of the Credit Amount
Once you’ve determined that your organization meets the eligibility requirements to qualify for the ERTC, the next step is to calculate the total amount of the credit your compan is eligible to receive for each eligible quarter for each eligible employee.
In short, the calculation utilizes the total qualified wages paid and the qualified health plan expense for each employee. From March 12, 2020, to January 1, 2021, any wages paid by the company while being at least 50 full-time employees on average in 2019 is considered to be credit.
However, once the eligible employer had paid wages for being at least 50 full-time employees of average in any calendar quarter, regardless of the number of full-time employees in such calendar quarter, all wages paid by such employer in any subsequent calendar quarter will be considered to be credit, even if there may be less than 50 full-time employees.
Also, if the health plan expense including the employee’s pre-tax contribution in a given month is paid or incurred by the eligible employer, but the employee continues to pay the portion of the health expense coverage, the employer can consider the employer equal to 1/12 of the health plan expense in each month for the purposes of the ERTC.
The total amount of any such health plan expense is extra benefit for the calculation of the ERTC.
Limitations and Restrictions
The Employee Retention Credit may have restrictions depending on the amount of qualified wages being claimed.
If a non-profit organization is claiming the Employee Retention Credit, then none of the wages associated with that credit can be used for other credits, including the Work Opportunity Credit.
Also, if a non-profit received a Payroll Protection Program loan that has been forgiven, then the wages used in order to compute the Employee Retention Credit cannot also be used in connection with that forgiveness.
Further, the credit cannot be claimed for any wages that are classified as Qualified Transportation Fringe Benefits or any group health care costs that are excluded from an employee’s income.
As the definition of what constitutes a group health plan is different from other areas of the law, the instructions to Form 943 state that group health plan does not include insurance providing other coverage, such as workers’ compensation and the similar.
However, Employee Assistance Programs and similar programs where the cost is excluded from an employee’s income are considered to be excluded from the definition.
It should be noted that this limitation surrounding the group health care costs only applies to non-profit organizations and only for wages paid after June 30, 2021.
For non-profit organizations that are eligible to claim the credit for the year 2021, this limitation creates some complexity because the Employee Retention Credit that can be claimed is limited to 70% of the wages for any quarter.
This 70% limitation under the CARES Act serves to restrict the total amount of the credit that can be claimed in any particular quarter, and therefore requires an ability to potentially re-calculate the amount of credit that can be claimed in a given quarter.
Applying for the Employee Retention Credit
Applying for the Employee Retention Credit is just one part of a process that can help nonprofits retain good employees who provide valuable services to their clients.
In fact, every eligible employer may claim the employee retention credit for all “qualified wages” paid from March 13, 2020, to December 31, 2020, and “qualified wages” paid from January 1, 2021, to June 30, 2021.
This allows the employer to ask for a refund of the employer share of the social security tax in 2020 and 2021.
The employer may be able to receive an advance payment of the credit in anticipation of the refund of the social security tax by submitting “Form 7200, Advance Payment of Employer Credits Due to COVID-19”.
Also, the employer can ask the IRS to refund any social security tax overpaid for 2020 by filing “Form 941-x, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund” option under the “credit for qualified sick and family leave wages” has been removed.
To provide further assistance to the eligible employer who have continued to pay “qualified wages” in the first half of 2021, the employee retention credit has been extended and amended.
For example, all “qualified wages” in any of the eligible quarters 2021 are taken into consideration, not just those in periods affected by a partial suspension of operations or a significant decline in gross receipts.
The employee retention credit it may also be claimed for wages qualified for the first and second quarter in 2021 as a refund of the employer share of the social security tax.
The employer may file “Form 941” for the appropriate quarter in the calendar year 2021 to claim the credit.
Remember, you can’t submit “Form 941” or “Form 941-x” more than once for the same calendar quarter.
Required Documentation and Forms
In case your association is acknowledged and is setting up the Employee Retention Credit Form 941, you ought to do as such.
There are various segments in the From 941 where you will be relied upon to outfit information about the got credit and the sums that you have embraced.
In line 11, you have to show the commitment aggregate for social security that has been balanced out by the portion of the laborer maintenance credits.
On line 13, you should demonstrate the gathering entirety for social security that has been settled up by the limit of the delegate support credit.
In conclusion on line 16, there is a touch of the improvements office use only which will ensure the year and quarter of entry of your structure 941.
It is basic two have an all-out work of completing the proper quick and dirty information to avoid causing an update from IRS.
It is moreover basic to demonstrate which quarter the advance is connected with since the Form 941 is finished on a quarterly introduce.
On the upper portion of this structure, you should fill in your business information in spite of the name sort you will have picked.
It could be a client’s business name or it could be your real business name relinquished.
The assurance of the name sort is under the watchful eye of you. You will in like manner need to show the cost obliged your laborers’ compensation among various information.
All things considered, the territory of the name disregard to the end is commonly dispensed for any additional notes and this is the recognize that you will show the changed aggregates for social security subject to the laborer support credit.
Filing Deadlines and Procedures
This user-friendly guide to the Employee Retention Credit for nonprofit organizations provides a comprehensive overview of the information organizations need to understandabout claiming the Employee Retention Credit.
This credit is made possible through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.This guide will provide an overview of some general criteria for employers to qualify to claim the credit (information relevant to eligibility can be found in Section 2).
Also, specific instructions and guidance related to the sections of Form 941 that employers should use to claim the credit and also forms that need to be submitted along with Form 941 are also provided for reference.
Lastly, this guide provides detailed guidance for employers about how they need to prepare Form 941 to reflect the Employee Retention Credit claims and the claims process in relation to payroll tax.
Please also refer to this guide for details pertinent to the 2021 Taxpayer Certainty and Disaster Tax Relief Act.
Interaction with Other COVID-19 Relief Programs
Employers that receive benefits through the Families First Coronavirus Response Act (FFCRA) for paying certain amounts of emergency paid sick leave or emergency paid family leave are not eligible to receive those same tax credits through the CARES Act to which they would otherwise be entitled.
However, many employers that are eligible for both programs – such as the tax credits under the CARES Act and the Employee Retention Credit – elect to first receive the full amount of benefits available under the CARES Act, in anticipation of potentially seeking tax credits later during the year 2020.
Also, as set forth in the Final Rule, employers that receive PPP funding are not eligible for the Employee Retention Credit.
This could be a little tricky because – as explained further here, in general, the Employer Retention Credit is available to employers that are engaged in a trade or business regardless of their tax-exempt – but the definitions section of the Final Rule provides that certain employers and transactions are not considered to be a trade or business for the purpose of the application of the CARES Act (and, therefore, not eligible for the tax credit).
On the other hand, loan forgiveness achieved by employers in connection to the PPP does not preclude those employers from claiming tax credits under the CARES Act, which is good to know.
Maximizing the Employee Retention Credit
Now that we have reviewed the background of the Employee Retention Credit and the eligibility, qualification, and calculation of the credit, let’s discuss how to maximize the Employee Retention Credit.
First, since the credit has been incorporated into the first two quarters of the employee payroll of 2021, it has expanded the relieved types of the quarters.
The paying tax liabilities could not be chosen until the finish of the single quarter, giving forth a major monetary relief to the qualified company, as directly paid cash grants.
Next, the maximum amount of the Employee Retention Credit has increased from $5,000 to $14,000 and the credit has extended to the first two quarters of 2021.
If a company is not eligible for the credit utilizing the 2020 gross receipts decline, it can still take the credit by anticipating the 2021 gross receipts decline.
However, the credit may be maximized if the employer definitely allocates the health plan expenses to the wages that are entitled to the credit.
These allocated health plan expenses are recognized as the qualified wages, then the qualified wages amount and thus the credit amount will be greater.
Well, for the plan itself, it is required for public employees. Also, certain requirements existing in other provisions of the tax law might be applicable, including the Internal Revenue Code, the Department of Labor, and the Employee Retirement Income Security Act of 1974. This is particularly significant.
Strategies for Non-profit Organizations to Optimize the Credit
Tax-exempt organizations can take several proactive measures to maximize their credit.
Most importantly, organizations should seek to expand their presence and influence in their respective communities, as such will allow them to more readily meet the 600-employee threshold.
One possible means of achieving this objective is for non-profits to realize mergers, consolidations, or other forms of strategic combinations.
By driving operational efficiency and presenting elevated opportunities for success, these actions often serve as an attraction for potential mergers or consolidations, and also serve to increase overall community fundraising potential – a major driver of operations and employee headcounts for many organizations.
Connecting with a knowledgeable professional will help you to get the strategy to optimize the credit because they know how to handle non-profit tax compliance.
Making sure to bear in mind that making any change in the existing state of organizations, like creating a new entity after a merger or consolidation, always require compliant documentation filed with competent authorities well in advance of claiming any tax benefit.
Last but not least, organizations should consider the various overlapping stimulus measures designed to offset negative impacts from the COVID-19 pandemic.
For example, non-profit employers that claimed the paid family and medical leave credit in tax years 2018 or 2019 are required to calculate potentially applicable offsets when determining the 2020 employee retention credit.
The vast majority of states and localities have either enacted, or are in the process of enacting, various forms of charitable contribution incentives.
These mechanisms are intended to help mitigate the potentially devastating loss of charitable support from reducing the number of taxpayers who may itemize deductions, as the Tax Cuts and Jobs Act of 2017 raised standard deduction thresholds for many taxpayers.
Non-profit employers should consult with competent professionals to discuss how to properly vet and document a claim to these state and local tax credits. By fully utilizing these overlapping incentive programs, tax-exempt organizations can bolster their employee retention activities.
Consulting with Tax Professionals
Consulting with tax professionals can help make the process of determining ERC eligibility and calculating the credit as smoothly as possible.
Having a process in place that allows for the efficient collection of necessary information and documentation is the most helpful for any potential claim,” says Gregory Sharer & Stuart CPAs.
Experienced tax advisors typically work with non-profits and understand the challenges these organizations face during the credit process, which is why Mr. Murray recommends that “non-profits should reach out to their tax professionals if they have any concerns or questions about any of the steps involved with claiming the credit.”
There are many different kinds of tax professionals with the expertise to help non-profits successfully secure the ERC, including Certified Public Accountants, Enrolled Agents, and tax lawyers.
Enrolled Agents in particular can provide a valuable service: “as federally-licensed tax practitioners who specialize in tax preparation, an Enrolled Agent can help you streamline and structure your data collection process by taking a look at what has been done historically, and put in place systems to take advantage of the tax credit.”
However, it is important to note that organizations “need to be thoughtful and careful about who they’re reaching out to in terms of asking for advice or in terms of hiring professional help.
As is the case with any professional service, there are some folks out there that are better and more qualified than others.”
Also, the IRS updates its online database of approved tax-exempt organizations including any organization that has had its exempt status revoked.
If so, and the organization applies for ERC based on eligibility as a tax-exempt organization, the IRS advised that the service will need to process the tax returns manually, and provided information as to how to indicate the revoked status in the returns.
For more information, see the IRS website on choosing a tax professional and general information provided for individuals and businesses by the IRS.
Potential Challenges and Considerations
The ERTC is a fully refundable payroll tax credit for employers up to a maximum of 70 percent of qualified wages paid to employees after March 12, 2020 and before January 1, 2021.
Qualified wages are limited to $10,000 per employee in each calendar quarter.
In addition to the definition and application of the chosen economic hardship, the IRS guidance has raised a number of other questions, such as the meaning of a full or partial suspension in operations and how an organization’s tax-exempt status will impact the analysis.
In particular, the IRS guidance indicates that a full or partial suspension is met by a government order while excluding decisions or actions of an employer that causes the organization to suspend operations.
But there may be different issues when volunteer-driven organizations make decisions on continued operations.
In addition, the application of the ERTC arises at the same time as potential opposition from the IRS to state and local tax deduction cap planning often referred to as “SALT planning”.
The situation occurs when an employer designates qualified wages and allocable health plan expenses in high SALT states, and the employer’s tax-exempt status means it is not subject to Section 280C using the underground regulation.
The ERTC and the SALT planning opposition will require more detailed analysis to ensure compliance with the SALT regulations and other federal tax implications.
Conclusion
The Employee Retention Credit (ERC) has proven to be a lifeline for many non-profit organizations struggling through the economic impacts of the COVID-19 pandemic.
While the program has concluded, understanding its eligibility, calculations, and claim process remains crucial for nonprofits who may still be able to claim credits they earned in previous quarters.
By carefully reviewing their financial records and government-imposed restrictions, organizations can assess their eligibility and potentially recover valuable funds to support their ongoing mission.
Consulting with tax professionals experienced in the ERC remains highly recommended to navigate the complexities and maximize potential benefits.
Remember, even though the program has ended, proactive action can still yield positive financial outcomes for your non-profit.
1. Non-profit organizations are eligible for the ERC under specific criteria related to government-ordered closures or significant revenue decline.
2. Eligible employers can claim credits for qualified wages paid to retain employees during defined periods in 2020 and 2021.
3. Understanding the two eligibility tests (gross receipts test and government orders test) is essential for determining qualification.
4. The credit amount varies depending on the specific quarter and eligibility test met.
5. Nonprofits should consult with tax professionals to ensure accurate calculations, compliance, and maximize their potential ERC benefit.
6. Although the program ended in 2021, retroactive claims for previous quarters are still possible with timely action.
