The employee retention credit (ERC) is a credit for employers against payroll taxes owed. The idea behind the credit is to lessen the financial strain of retaining employees during the COVID-19 pandemic. The maximum value of the credit is $5,000 per employee in 2020 and $14,000 per employee in 2021.
Many nonprofits may have assumed their organization does not qualify for the credit. In fact, tax-exempt organizations can qualify for the ERC, and it can potentially be worth a lot of money.
Who is eligible to take the ERC?
Any employer who has either of the following can take the credit:
1. A partial or full suspension of operations due to a governmental order (e.g. shutdown or stay-at-home order).
Any suspension of operations that has more than a nominal impact on the organization and is due to a governmental order that limits commerce, travel, or group meetings should qualify under this test.
OR
2. A significant decline in gross receipts as compared to 2019.
For tax-exempt organizations, “gross receipts” means the gross amount received by the organization from all sources without reduction for any costs or expenses and includes grants and contributions, payments for services, membership dues, investment income, and all other amounts received by the organization (aside from PPP loans).
If gross receipts for any quarter in 2020 were less than 50% of gross receipts for the same quarter in 2019, the organization is considered to have had a significant decline in gross receipts. For 2021, the gross receipts test is easier to meet: For each of the first two quarters of 2021, if the organization’s gross receipts are less than 80% of gross receipts for the same quarter in 2019, the organization has had a significant decline in gross receipts.
How do you calculate the credit?
If your organization meets either of the above tests for 2020 and/or the first two quarters of 2021 (suspension of operations due to governmental order or significant decline in gross receipts), here’s what you need to know in order to calculate the credit.
For 2020, the credit is calculated differently for employers with more than 100 full-time employees on average during 2020 (large employer) or less (small employer). Small employers can take a credit of 50% of wages paid to employees after March 12 in any quarter for which there was either some suspension of operations due to governmental order or a significant decline in gross receipts. Once the employer qualifies for the ERC for a quarter, the credit can also be taken for subsequent quarters in 2020 until after the quarter in which gross receipts (for the quarter) surpass 80% of 2019 gross receipts (for that same quarter). Maximum value of the credit in 2020 is $5,000 per employee (50% of up to $10,000 of wages). Wages used for PPP loan forgiveness or other credits (Family First Credit, Work Opportunity Credit, etc.) cannot be included in the ERC calculation.
The calculation is the same for large employers as for small employers in 2020, but wages only qualify for the credit if paid while the employee was not providing services (e.g. the employee was furloughed).
For 2021, a “large employer” is one with more than 500 full-time employees. As with 2020, large employers in 2021 can only take the credit for wages paid to employees who were not providing services. For small employers in 2021 (which includes many more employers than in 2020 due to the 500-employee threshold), the ERC takes into account all wages paid to the employee during the quarter, up to $10,000 per employee per quarter.
The credit for both small and large employers is 70% of eligible wages for a maximum credit of $7,000 per employee for each of the first two quarters of 2021. Similar to 2020, wages used for PPP loan forgiveness or other tax credits may not be included in the ERC calculation.
How do you claim the ERC?
Employers claim the ERC for 2020 by filing a 941-X (amended form 941). Likewise, the ERC for the first quarter of 2021 is claimed by filing a 941-X. Employers can claim the ERC for Q2 of 2021 on the original Form 941 filed with the Service for the quarter.
If you are still unsure if your organization qualifies for the credit or how to calculate or claim the credit, please reach out to our team and avoid leaving tens of thousands of dollars on the table.
Categories: Tax, Tax Planning, Not-for-Profit, Small Business, COVID-19 Resources
