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Are Nonprofits Eligible for the Employee Retention Tax Credit?

March 15, 2021

Wondering if your nonprofit organization qualifies for the ERC? We can help.

Have you determined if your organization is eligible for the Employer Tax Credit? Many nonprofit organizations have been able to get critical support from ERC, here’s how you can find out more about ERC and if you quality:

What is the Employee Retention Tax Credit (ERC)?

ERC is a refundable tax credit applied against certain employment taxes (Social Security, Medicare, etc.) of qualified wages an employer pays to its employees.

How does it help nonprofits?

Many organizations were forced to completely or temporarily shut down because of the COVID-19 pandemic, including nonprofits. The Coronavirus Aid, Relief and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) and the ERC, both of which can support nonprofits as they look to reopen. Hospitals, schools, museums, churches, performing arts centers and other nonprofit organizations are able to benefit from the ERC.

When can I use the ERC?

The credit was originally set to expire on January 1, 2021 but is now extended to June 30, 2021. There is potential opportunity for many employers to benefit, especially if they aren’t getting a PPP2 loan.

Prior to the Consolidated Appropriations Act, enacted on December 27, 2020, the CARES Act didn’t allow an employer that received a PPP loan to also benefit from the ERC. The new relief act retroactively eliminates this limitation and allows for both employers to benefit from ERC, but they cannot use the same wages (i.e. no double dipping).

Is there a difference in ERC in 2020 vs. 2021?

ERC has been increased in the new act. For 2020, the credit covers up to 50% of qualified wages paid by the employer—up to $10,000 in wages or health care expenses per employee (paid between March 13 and December 31, 2020), for a total available credit of $5,000 per employee.

For 2021, the credit covers up to 70% of eligible wages paid by the employer—up to $10,000 per employee per quarter for the first two quarters of 2021, for a total available credit of $14,000 per employee.

How do you qualify for the credit?

There are 2 ways to qualify for the credit –

  • The 1st criteria – did you experience a “full or partial suspension of operations during any calendar quarter because of governmental orders limited commerce, travel or group meetings due to COVID”. Many organizations were required to close facilities for a period of time (i.e. child and day care, fitness facilities, counselling services, etc.). If an organization was able to pivot to provide remote or virtual services this criteria may not apply. This criteria also applies if there was an outbreak that required temporary closure.
  • The 2nd criteria - did you have at least a 50% decline in gross receipts in any quarter in 2020 compared to the same quarter in 2019 (20% in 2021 when compared to 2019) .

The IRS has put together FAQs to address additional questions regarding full or partial suspension of operations.

Which wages qualify for the ERC?

The wages and healthcare costs that qualify for ERC are wages that have not been used for PPP forgiveness or other federal grants and contracts, federal relief, etc. during the period that you identified as a full or partial suspension of operations or had decline in gross receipts in any quarter compared to 2019 (see previous question). In addition, the salaries that were not included in PPP, such as the amount of the salary above $100k that did not qualify for PPP forgiveness, can be included for ERC.

Making sure that you have proper support of the wages and health care expenses used in ERC vs. other sources is critical to show that “double dipping” has not occurred.

How to File for the Credit

The most efficient option to obtain the credit is through your payroll company through the Quarterly Payroll Tax return Form 941. If applying for the credit related to a period that is already filed then you would file an amended Form 941X.

What do I do if I am contacted by a vendor who will charge a percentage of my total credit?

Be very wary of vendors contacting and charging a percentage of the credit. We have heard from several clients that they were offered this service at rate 20% of the total credit. Considering these credits can provide some significant relief 20% could end but being a six figure service fee for a modification of a quarterly payroll return.

Unfortunately, there are a many fraudsters out there as well as others claiming to be experts in ERC ready to take advantage of employers that are struggling. My recommendation is to contact your payroll advisor or your CPA to assist you with this process.

The most critical factor in ERC is documentation on how you qualify under the criteria and the wages and healthcare costs used to obtain the credit.

If you need assistance to determine if you qualify, we are here to help.

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