Nonprofit organizations were certainly not immune to the effects of the COVID-19 pandemic. Many nonprofits were forced to temporarily cease operations or significantly limit service offerings. Various rounds of governmental funding were rolled out to support employers and encourage organizations to continue paying employees even if the entity was forced to shutter under a governmental order.
Most have heard of the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), and EIDL Emergency Grants. But many have still not heard of the Employer Retention Credit (ERC). It is one of the most under-advertised government stimulus opportunities, yet arguably one of the most beneficial provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act issued in March 2020. Under the CARES Act, organizations could take advantage of either the PPP or the ERC, but not both. However, in early 2021, the Relief Act and subsequent American Rescue Plan Act retroactively eliminated the limitation that organizations must choose between the PPP or ERC.
So, let’s break this down into real terms for real-world nonprofits:
What is the Employee Retention Credit? The ERC is a refundable payroll tax credit available to employers who meet qualifying criteria as set forth by the Consolidated Appropriations Act of 2021.
The ERC can be claimed quarterly to help offset the cost of retaining employees, even throughout the pandemic.
Eligible employers may receive a credit of up to 50% or $5,000 of each employees’ qualified wages for 2020 and up to 70% or $7,000 per quarter of employees’ qualified wages for 2021.
Unlike the PPP, which was released on a first come, first-serve basis, the ERC covers all affected quarters in 2020 and 2021. The ERC can be claimed up to three years from the date the applicable payroll tax return was filed.
Who is eligible for the ERC? To claim an ERC for any quarter in 2020 or 2021, an nonprofit organizations need to meet one of two qualifying events:
Full or partial closure due to government order, or
A significant decline in gross receipts during the calendar quarter compared to the same quarter in 2019. Specifically, gross receipts reductions of 50% or more for 2020 and 20% or more for 2021.
Can a nonprofit claim the ERC after receiving a PPP Loan? YES! As noted above, revisions to the ERC rolled out in 2021 no longer force organizations to pass up the opportunity to obtain an ERC because they received a PPP loan.
IMPORTANT NOTE: Organizations cannot “double dip” meaning that wages covered under the PPP loan cannot also be covered under the ERC (or any other grant awarded specifically for salaries). Contemporaneous documentation outlining the use of these funds is critical.
How are credits received? Eligible nonprofits will report their total qualified wages for purposes of the ERC for each calendar quarter on their federal employment tax returns, usually Form 941 (Employer’s Quarterly Federal Tax Return). ERC amounts in excess of taxes due will be refunded directly to the organization.
PRO TIP: Be sure not to “net” credits against employer tax expense when recording taxes paid and the ERC received in your accounting software!
If an organization has already filed their Form 941 for a reporting period in which they qualify for the ERC, an amended return (941-X) can be filed.
What should a nonprofit do to claim the ERC?
If an organization has not yet applied for forgiveness of a PPP loan, strategize within the financial management team to capitalize on the amount of wages covered by the PPP to ensure maximum benefit can be obtained by the ERC.
Reach out to your advisor for guidance under your specific circumstance.
Inquire of your third-party payroll provider if they have a report created within their framework that can automatically extract the data necessary to calculate the ERC.