Employee Retention Credit: New Angles for Nonprofits

If your not-for-profit managed to keep staffers employed throughout the COVID-19 pandemic, there could be a tax reward. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, employers may be entitled to claim an Employee Retention Credit (ERC) for wages paid between March 13, 2020, and December 31, 2020. In December of 2020, the Consolidated Appropriations Act (CAA) enhanced and extended the credit through June 30, 2021. And on March 11, 2021, the American Rescue Plan Act (ARPA) extended the ERC until December 31, 2021,

In addition, the IRS recently issued guidance (Notice 2021-20) for employers — including nonprofits — that may claim the ERC.

CARES Act Provisions

Last year, the CARES Act provided a dose of tax relief to struggling nonprofit employers. Under this law, organizations could claim the ERC for up to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers were able to benefit immediately from the credit because it reduced the Social Security component of tax deposits. If an employer's current payroll tax deposits weren't enough to cover the credit, the nonprofit could obtain an advance payment from the IRS.

To qualify for the ERC under the CARES Act, an employer had to meet one of two requirements during any calendar quarter:

1. It was forced to suspend operations because government authorities limited commerce, travel or group meetings due fully or partially to pandemic concerns, or

2. It must have experienced a significant decline in gross receipts. For this purpose, a "significant decline" occurred when gross receipts were less than 50% of gross receipts in the same calendar quarter of 2019.

The first $10,000 of wages paid to an employee during the designated time frame qualified for the credit. Therefore, employers could claim a maximum credit of $5,000 per employee.

The number of employees eligible for the credit depends on the size of the employer. Specifically, if your nonprofit averages more than 100 full-time employees, only wages for those who aren't working due to operations suspension or a shutdown may be claimed. If you have 100 or fewer full-time workers, you may claim wages for all employees, regardless of whether they're working. For this purpose, a full-time employee is defined as someone who worked at least 30 hours per week in a calendar quarter in 2019 or 130 hours in a month (for example, the monthly equivalent of 30 hours per week) and meets requirements of the employer shared responsibility provision of the Affordable Care Act (ACA).

Prohibitions to Claiming the Credit

The CARES Act also prohibits employers from claiming the credit if the wages for which the credit being claimed are the:

Same wages for which a tax credit for paid sick and family leaves was claimed under the Family First Coronavirus Response Act,

Same wages for which a tax credit was claimed for paid family and medical leaves under the Section 45S initially authorized by the Tax Cuts and Jobs Act,

Wages are payments to certain related individuals, or

Wages are paid to an employee for which the employer claims a Work Opportunity Tax Credit.

CAA Changes

In addition to extending the credit, the CAA increased it from 50% to 70% of the first $10,000 of qualified wages for two quarters, for a maximum credit per worker of $14,000 (70% x $10,000 of qualified wages x two quarters). The ARPA extends it for the last two quarters of 2021. Thus, the maximum ERC amount available is generally $7,000 per employee per calendar quarter or $28,000 per employee in 2021.

Other important changes were made by the CAA. For example, employers that receive Paycheck Protection Program (PPP) loans may still qualify for the ERC for wages that aren't paid with forgivable PPP loan proceeds.