A Complete Guide to the Employee Retention Credit For Non-Profit Organizations

erc for non profits

February 1, 2024

Are Nonprofits Eligible For ERC?

Navigating the complex world of tax credits can be overwhelming. But what if we told you that your cherished community church, local homeless shelter, and other nonprofits just might be eligible for the Employee Retention Credit (ERC)? If they’ve experienced a government-ordered shutdown or witnessed a notable dip in revenue as a result of the pandemic, they could qualify.

In this article, we’ll break down ERC rules for nonprofits so you claim every dollar your organization qualifies for. 

What is the Employee Retention Credit (ERC) for Nonprofits?

The Employee Retention Credit (ERC) for non-profits is a tax credit designed to encourage organizations, including non-profit entities, to retain employees.

This credit provides financial relief to eligible employers by offering a refundable tax credit against certain employment taxes. Nonprofits must meet specific eligibility requirements related to government mandates and gross receipts tests to qualify for this valuable benefit.

Eligibility requirements for nonprofits

It’s important to understand the necessary criteria for nonprofits to be eligible for the Employee Retention Credit. You’ll have to check off these requirements if you want to claim this valuable credit for your business.

  • Nonprofits must have faced a significant drop in gross receipts. Compare your organization’s revenue from 2020 or 2021 with the same quarter in 2019. If you see more than a 50% reduction in any quarter of 2020, or a 20% reduction in the first three quarters of 2021, your nonprofit may qualify.
  • Alternatively, government orders may have affected your operations. If a federal, state, or local mandate partially or fully shut you down, or limited your commerce, travel, or group meetings due to COVID-19 during any quarter of 2020 or 2021, you may meet this requirement.
  • Full-time employee count matters. Look at the average number of full-time staff you had during 2019. If you had more than 100, that means the credit only covers wages paid to employees not providing services. With fewer than that number, all wages could potentially qualify.
  • Your nonprofit cannot double-dip with PPP loans and ERC for the same payroll costs. However, if some payroll costs were not covered by PPP loans, those could potentially be claimed under ERC.
  • You need to include all types of full-time employees on the books during the eligibility period when assessing qualification criteria. This ensures all eligible staff is counted toward meeting thresholds for the credit.
  • Finally, special rules apply for group structures where nonprofits might be affiliated with other organizations; combined employee counts could affect eligibility and credit amount calculations.

Government mandate test

Understanding the rules for ERC is crucial. One key rule is the government mandate test. Nonprofits must have been shut down or partly stopped because of a government order. This could be due to lockdowns, restrictions on public gatherings, or restrictions that affected how you did your work.

Think back to how you operated in 2020 and 2021. Were your operations substantially different between then and 2019? Did you make those changes as the result of a government mandate? If so, you may meet the government mandate test. 

Gross receipts test

The “gross receipts test” is crucial for your nonprofit to qualify for the Employee Retention Credit. It means looking at your income from a certain quarter and comparing it to the same period in 2019.

If you see a 50% or greater drop between the same quarters in 2019 to 2020 , or a 20% or greater drop between the same quarters in 2019 to 2021, that’s a sign COVID-19 hit you hard financially. This means you may be eligible for a significant payroll tax credit. 

erc for non profits

 

Enhanced benefits for nonprofits

Since COVID, many non-profits have been concerned about financial sustainability. On top of this issue is the ability to retain employees so your organization can maintain its operations and serve the community.

With the ERC, your non-profit can secure its workforce, achieve financial stability, and continue providing valuable services to those in need. The types of non-profit organizations that may qualify for the ERC include credit unions, libraries, private schools, churches, museums, and hospitals.

Combination with PPP

Nonprofits can benefit from the Employee Retention Credit (ERC) in combination with PPP loans, even if they received Paycheck Protection Program (PPP) funds. The Consolidated Appropriations Act makes it clear that nonprofits that obtained PPP loans are no longer excluded from the ERC, so long as they do not impermissibly claim the same wages for both programs.

This means nonprofits can potentially take advantage of both sources of relief to support their operations and retain employees during challenging times, maximizing their available financial assistance opportunities.

In considering the combination with PPP, it’s crucial for nonprofits to navigate the guidelines effectively to ensure they comply with all requirements and fully leverage the benefits offered by both programs.

Can Nonprofits, including Churches, Receive the ERC?

Yes, nonprofits, including churches, can be eligible for the ERC. There are specific eligibility criteria that must be met in order to qualify for the credit rate and additional considerations for clergy members.

It’s important for non-profit organizations to understand these requirements in order to determine their eligibility for the ERC.

Eligibility for ERC rate

Nonprofits, including churches, can claim the Employee Retention Credit (ERC) if they meet either the government mandate test or the gross receipts test. 

The eligibility for clergy in nonprofits includes ministers performing religious duties who are considered employees for federal employment tax purposes. Churches and other religious organizations can qualify for this credit if they meet the specific requirements laid out by the Internal Revenue Service (IRS), focusing on qualification criteria related to their operations and financial situations.

Eligibility for clergy

The eligibility for clergy includes having a reduction in gross receipts of more than 20% compared to the same quarter in 2019, as well as full or partial suspension due to government orders. Documentation demonstrating these criteria is crucial for claiming the ERC.

However, it is important to note that wages paid to clergy and pastors may not be qualifying if those employees are exempt from federal employment taxation. 

Steps for Nonprofits to Claim the ERC

Gathering all your necessary information and calculating the credits are essential steps for nonprofits to claim the ERC. 

Gather necessary information

To claim the ERC, nonprofits should gather the following information:

  1. Quarterly financial statements and payroll records as required documentation.
  2. Any government orders impacting their operations.
  3. Calculate qualified wages and credit amounts eligible to claim based on IRS requirements.

Calculate credits

We calculate credits based on specific criteria, including government-ordered suspension and significant revenue drops in 2020 and 2021. Here’s what you need to consider:

  1. Determine if your nonprofit was fully or partially suspended by a government order during any calendar quarter in 2020 or 2021.
  2. Assess whether there was a significant decline in gross receipts for the same quarters compared to the corresponding quarter in 2019.
  3. Calculate eligible wages paid during the suspension period and/or the periods in which you saw a decline in gross receipts.
  4. Consider how your PPP impacts your ability to claim the ERC for payroll costs.

File for ERC

To file for ERC, we recommend following these steps:

  1. Gather all necessary information, including Form 990, payroll tax records, and tax returns.
  2. Calculate the credits based on qualified wages, health plan expenses, and eligible employer contributions.
  3. Complete the IRS Form 941 or 943 to claim the credit against payroll taxes or request an advance payment using Form 7200.
  4. Consider seeking assistance from someone with experience working with the ERC, like Smart ERC’s network of former IRS Auditors, to align your claim with IRS rules and guidelines.
  5. Report ERC as income on financial statements following ASC 958 – 605 guidelines.

Examples of Nonprofits Benefiting from ERC

Many nonprofits, including charitable organizations and community service groups, have seen a substantial boost in financial stability through the ERC. For instance, low-income housing providers are using the credits to maintain affordable housing options during times of economic uncertainty.

Another notable example is that healthcare organizations have been able to retain essential staff and enhance patient care by leveraging the benefits of ERC, helping to ensure continued access to vital medical services for communities in need.

Furthermore, educational institutions have utilized the credit to protect teaching positions and offer continuous learning opportunities for students despite budget constraints caused by the pandemic.

erc for non profits

 

Conclusion

In conclusion, nonprofits can take advantage of the Employee Retention Credit (ERC) by meeting eligibility requirements and tracking wages accurately. 

It’s crucial to document eligibility and track wages used for recognizing revenue or federal funding to ensure appropriate accounting treatment and well-supported claims.

Key Takeaways

  • Nonprofits, including churches, can potentially claim the Employee Retention Credit (ERC) if they were hit hard financially by COVID-19 or had to stop some activities due to government rules.
  • To claim the ERC, nonprofits must show a big drop in revenue or that the government told them to close their doors and/or limit gatherings during certain times in 2020 and 2021.
  • The credit rate for eligible non-profits is 50% of qualified employee wages for 2020 and 70% of qualified employee wages for 2021. This can be up to $5,000 per eligible worker for tax year 2020 and $7,000 per eligible worker per quarter for the first three quarters of 2021.
  • Even if a nonprofit got a PPP loan, they might still qualify for the ERC. They just cannot use both for the same payroll costs.
  • Nonprofits should keep good records and track all employee wages used to ask for this credit. It’s important to follow all guidelines correctly when reporting on financial statements.

FAQs

1. Can nonprofit organizations get the Employee Retention Credit (ERC)?

Yes, nonprofits, including tax-exempt organizations, could potentially be eligible for ERC under the CARES Act to help them keep employees and manage finances during tough times.

2. Are churches able to receive the ERC too?

Churches fall under nonprofit status and can apply for Employee Retention Credits if they meet certain conditions set by the IRS.

3. What types of payments qualify for ERC in nonprofit organizations?

Nonprofits can count wages like salaries paid to employees and qualified health plan expenses (that are not otherwise reimbursed through another tax provision elsewhere) towards their eligibility for the Employee Retention Credit.

4. Do nonprofits have to pay back the credit received from ERC?

No. Nonprofits do not need to repay Employee Retention Credits received since it’s a form of federal tax credit designed to support them through difficult economic periods.

5. How does a nonprofit report its use of ERC?

Nonprofits could benefit from the skills of former IRS Auditors like the ones at Smart ERC to help prepare financial documents such as IRS Form 990, which includes reporting FICA taxes withholdings used towards receiving the Employment Retention Credit.

6. If a nonprofit took out a loan under PPP, can it still claim ERC?

Yes, after changes from the American Rescue Plan Act; however, they cannot double-dip—they must ensure payroll costs claimed with PPP aren’t used again for calculating their Employee Retention Credit.

Having served as an IRS Auditor for over 13 years, I have acquired a deep understanding of the tax-related challenges that business owners encounter. My primary goal is to ensure that we deliver accurate and dependable information. We aim to provide you with peace of mind as we expertly guide you through the entire process.”

– Alejandra Astudillo, Former IRS Auditor

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