During the height of the COVID-19 pandemic, many businesses, both for-profit, and not-for-profit, were scrambling to find innovative ways to stay open. A lot of them were at risk of having to shut their doors entirely due to government orders.
A government initiative enacted in March 2020 to help such businesses stay afloat financially during the pandemic was the Employee Retention Credit, commonly referred to as ERC. Part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), the ERC is a fully refundable tax credit. The goal of the ERC? To encourage eligible employers to keep their employees on the payroll during the pandemic.
The Employee Retention Credit wasn’t intended only to help for-profit businesses, though. The tax credit also provides financial assistance for nonprofits and recovery start-up businesses. Some nonprofit employers didn’t realize this and therefore didn’t claim the ERC against their payroll taxes in 2020 or 2021.
There’s good news for these employers if they meet specific requirements because they can still retroactively apply for the Employee Retention Tax Credit. Similarly, tax-exempt organizations are eligible for the Employee Retention Credit if they are considered to be involved in a trade or business regarding the entirety of their operations.
ERC Eligibility for Nonprofit Organizations
To be considered an eligible employer, a nonprofit must pass either the Gross Receipts Test (GRT) or the Government Orders Test (GOT) – but not both. This type of business must also employ at least one full-time W-2 employee. Types of nonprofit organizations eligible to apply for the ERC include libraries, churches, museums, private schools, hospitals and credit unions.
Gross Receipts Test
For eligibility under the Gross Receipts Test, a nonprofit employer had to have experienced a significant decline in gross receipts during the calendar quarter in question. For 2020, the amount of decline was 50 percent compared to the same quarter in 2019; for 2021, it was 20 percent.
Government Orders Test
For eligibility under the Government Orders Test, a nonprofit employer had to have operations fully or partially suspended during the calendar quarter due to governmental COVID-19 orders limiting commerce, travel or group meetings. Wages that were paid during the period the government mandates were in effect may qualify.
How to Claim the ERC
Once you’ve verified your eligibility to receive the Employee Retention Tax Credit for your nonprofit organization, you’ll need to file IRS Form 941-X. This is to amend the returns you filed through Form 941 for the quarters during which your business was an eligible employer.
Eligible nonprofit employers claiming the ERC for the second, third or fourth quarters of 2020 must submit their amended 941-X by April 15, 2024. If you’re an eligible employer claiming the Employee Retention Credit for a quarter in 2021, you must submit your amended 941-X by April 15, 2025.
How Eligible Employers Can Calculate Their ERC
The amount of your Employee Retention Tax Credit is calculated based on the total qualified wages of your full-time employees and includes health plan expenses paid to them. It varies, especially because it is based on the number of employees you had in 2020 and 2021. If you paid wages during this time period through funds from a Paycheck Protection Program (PPP) loan, that also might affect your ERC amount.
Once again, your Employee Retention Tax Credit for 2020 is equal to 50 percent of the qualified wages you paid for 2020, and for 2021, it’s 70 percent of those wages. For 2020, the maximum credit amount is $5,000 per employee per quarter, and for 2021 it’s $7,000 per employee per quarter. Your total ERC amount is calculated based on the total number of employees you had in each of those two years.
You run a nonprofit organization that employs 20 individuals and raises money for children of low-income families. Your gross receipts for the fourth quarter of 2020 were $125,000 compared to $250,000 in the same calendar quarter in 2019. That means you had a 50 percent loss in gross receipts for that quarter and are therefore eligible for the Employee Retention Tax Credit.
What Are Gross Receipts for a Non-profit for ERC?
Because nonprofit organizations are run somewhat differently from their for-profit counterparts, there are some variances in their tax rules. For example, items considered to be included with their gross receipts include:
- Gross receipts from the sale of products or services
- Contributions, gifts and grants
- Gross amount received as investment income, such as interest, dividends, rents and royalties
- Dues or assessments from members or affiliated organizations
- Gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale
Other Important Considerations
Another difference nonprofit organizations have compared to for-profit businesses is that the qualified wages paid in 2021 they’re utilizing to apply for the ERC are not allowed to also be used for other credits and programs such as:
- Research & Development Credit
- Family and medical leave credit Code Sec 45S
- Family leave credit under Code Sec 3132
- Sick leave credit Code Sec 3131
- Military differential wage payment credit
- Indian employment credit
- Empowerment zone credit
- Shuttered venues grant
- Restaurant revitalization grant
What About the Paycheck Protection Program?
The Paycheck Protection Program (PPP) was enacted in March 2020 and offered forgivable loans to assist businesses by keeping their workforce employed during the COVID-19 pandemic. Business employers could utilize PPP loans for payroll or other operating costs, such as rent, mortgage interest or utilities.
Like other types of businesses, nonprofits and other tax-exempt organizations can claim the ERC even if they received a loan through the PPP. But, any payroll expenses paid for by funds from a PPP loan are not considered eligible for ERC nonprofit wages.
Tips for Reporting Your ERC on Financial Statements
As a nonprofit, reporting your ERC on financial statements should consist of the following:
- Statement of Financial Position: A current receivable should be recognized for the portion of credit for which you qualify, even if you haven’t yet received it. Also, a refundable ERC advance should be classified as a current liability.
- Statement of Activities: ERC activity should be reported at your gross amounts, while contribution revenue and payroll taxes are to be recognized at gross.
- Disclosures: You should disclose pertinent information, including a description of the Employee Retention Tax credit and information about the amounts, eligibility requirements and other such data.
As an employer at a nonprofit organization, you already know that the financial aspects of such an operation vary from those of for-profit businesses. You receive some advantages as a tax-exempt organization, but that doesn’t mean that accounting for those benefits is easy.
At StenTam, our specialists have extensive knowledge in finance and assisting businesses of all types – including nonprofit organizations. When you enlist our services, we’ll equip you with a dedicated client support specialist to assist you during the entire filing process. We’ll also provide you with the best experience, highest return and compliance-focused process. Reach out to one of our tax specialists today to see how your nonprofit could benefit from the Employee Retention Tax Credit.