Many churches and nonprofit organizations are seeking financial support to sustain their ministry and staff during these challenging times. One possible solution is the Employee Retention Credit (ERC). This article will discuss the basics of the ERC and how it can benefit your church or organization. We will also address common misconceptions and provide insights to help you determine if the ERC is right for you.
The Employee Retention Credit is a federal payroll tax credit created under the Tax Relief Act of 2020 to encourage eligible employers to keep their full-time employees on payroll during the COVID-19 pandemic. Eligible employers can claim the credit on their federal payroll tax return for qualified wages paid to employees experiencing a significant decline in gross receipts or a suspension of operations due to government mandates.
Churches and nonprofits may be eligible for the ERC if they experienced a significant decline in gross receipts during a calendar quarter of 2020 or 2021 compared to the same quarter in 2019. They also qualify if their operations were fully or partially suspended due to a government order during the period. To claim the ERC, churches and nonprofits must provide necessary documentation to the IRS.
While the ERC is a valuable tax relief option for churches and nonprofits, it is important to consider other available tax benefits, such as Paycheck Protection Program (PPP) loans, before making a decision. The ERC differs from other tax relief programs in that it focuses on retaining employees, whereas PPP loans focus primarily on providing general financial support.
To qualify for the ERC in 2021, churches and nonprofits must have experienced a significant decline in gross receipts in a quarter of 2021 compared to the same period in 2019 or have experienced a full or partial suspension of operations due to a government order. Eligible wages paid to employees during these quarters can qualify for the credit.
In 2021, several changes have been made to ERC regulations, including the maximum credit per employee, which has increased, and the inclusion of part-time employees in the calculation. Also, the credit now applies to all quarters of 2021 and the first quarter of 2022.
Eligible churches and nonprofits can claim the ERC by filing the appropriate tax forms for each quarter in which they were eligible, detailing the gross receipts and qualified wages paid. The IRS provides guidance on the required documentation and filing process.
Claiming the ERC per employee can generate substantial savings for churches and nonprofits. The maximum credit in 2020 is 50% of qualifying wages (up to $10,000) paid to an employee for the year, capped at $5,000. In 2021, the maximum credit increases to 70% of qualifying wages (up to $10,000) per employee per quarter.
By claiming the ERC, churches and nonprofits can offset their payroll tax liabilities and retain more of their budget for essential programs and operations. This extra cashflow can facilitate long-term ministry growth and development, ultimately allowing these organizations to better serve their communities.
Retaining employees during times of economic hardship enables churches and nonprofits to maintain consistency and avoid rebuilding their staff from scratch when conditions improve. Employee retention reflects positively on a faith-based organization, fostering trust and loyalty from both staff members and the community it serves.
Although designed to complement each other, the ERC and PPP loan can potentially overlap. Churches and nonprofits must carefully navigate the eligibility criteria for both programs to avoid jeopardizing their financial relief benefits.
As of 2021, churches and nonprofits can claim the ERC even if they have received a PPP loan, as long as the same wages are not used for both programs. It is crucial to avoid "double-dipping," or using the same wages to claim the ERC and justify PPP loan forgiveness, as this could lead to penalties or the disqualification of benefits.
As previously mentioned, churches and nonprofits are now able to claim both the ERC and PPP loan in 2021, as long as they do not double-dip. Additionally, ERC eligibility has undergone several changes, including an increase in the maximum credit per employee, part-time employee inclusion, and expanded application to all quarters of 2021 and the first quarter of 2022.
Some believe that clergy members are not eligible for the ERC. However, the credit is open to all full-time employees, including clergy and other church leaders. It is also important to note that part-time employees now qualify for the ERC, as of the 2021 updates.
Government orders or mandates play a significant role in ERC eligibility; they must be in effect during the period when operations were either fully or partially suspended. A clear understanding of government mandates and their effect on your organization's operations is essential when claiming the credit.
It's crucial to differentiate between a full or partial suspension of operations versus a significant decline in gross receipts when determining ERC eligibility. Although both circumstances qualify an organization for the credit, each might require different documentation and calculations to properly claim the employee retention credit.
The ERC is valuable tax relief for churches and nonprofits. By claiming the ERC, churches and nonprofits can offset their payroll tax liabilities and retain more of their budget for essential programs and operations.
Retaining employees during times of economic hardship enables churches and nonprofits to maintain consistency and avoid rebuilding their staff from scratch when conditions improve.
Eligibility criteria for ERC have changed, including an increase in the maximum credit per employee, part-time employee inclusion, and expanded application to all quarters of 2021 and the first quarter of 2022.