Many not-for-profit organizations were forced to completely shutter operations because of the COVID-19 pandemic, making them eligible candidates for the Employee Retention Credit (ERC) benefit in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The credit can be claimed quarterly to help offset the cost of retaining employees. It is important to note that the ERC is only available for organizations that did not receive a Paycheck Protection Program (PPP) loan. The ERC is provided by way of a payroll tax credit covering the period March 13, 2020 through Dec. 31, 2020.
Mechanics of the Program
In addition to private sector businesses, the ERC is available to tax-exempt organizations that have experienced a full or partial suspension of operations, as well as those experiencing significant decline in gross receipts due to the COVID-19 pandemic. Qualified wages will be determined based on the number individuals an organization employs. Once an employer determines eligibility, it should analyze eligible quarters, identify total employee count, and then calculate the credit based on qualifying wages. This calculation will ultimately reduce the wage/health-insurance deduction on an income tax return.
The ERC is a 50% credit based on the first $10,000 of per-employee compensation for all calendar quarters, including healthcare benefits paid to employees. Organizations that averaged more than 100 full-time employees and:
- Whose gross receipts declined by more than 50% compared to the same quarter in 2019, or
- Had their operations fully or partially suspended as part of the virus response, will treat as eligible wages those amounts paid to employees not providing services.
Organizations that averaged 100 or fewer full-time employees may treat any wages paid to employees (up to the $10,000 limit) during either of the two conditions as eligible wages, regardless of whether the employee provided services during that time.
Under the provision’s language, entities eligible for the ERC must carry on a regular trade or business. Federal, state, and local governments are not currently allowed to take the credit as well as certain government affiliates. But tax-exempt organizations are eligible for the ERC because they are deemed to be engaged in a trade or business regarding the entirety of their operations.
The CARES Act left many critical nuances of the ERC unanswered, but the IRS further clarified the ERC with 95 frequently asked questions (FAQs). A full description of the ERC can be found on the IRS website as well as a comprehensive list of FAQs.
It will be very important for your organization to assess qualified wages to determine your maximum benefit. Among other clarifications, the IRS FAQs specify how hourly and “non-exempt” salaried wages of employees are taken into account, as well as wages paid to “exempt” salaried employees. The qualifying wages for purposes of an ERC can be calculated by using any reasonable method to determine the number of hours including variable hourly employees. An employer may not treat the hours as having been reduced based on an assessment of productivity levels.
Qualified wages paid to an employee may not exceed what the employee would have earned for 30 days preceding suspension of activities or significant decline in gross receipts for a business or organization with more than 100 employees. A reasonable determination includes the hours that a salaried employee did not provide services, but for which the employee earned wages under leave. Measuring an exempt employees' entitlement to leave on an intermittent or reduced schedule under the Family and Medical Leave Act (FMLA) is also reasonable.
IRS Notice 2020-22 and IRS Notice 2020-35 provide assurance that adjustments to payroll tax liabilities on account of the ERC will not be subject to Federal Tax Deposit penalties or interest on accidental overstatement of the credit. Congress also is contemplating changes to the ERC that would increase the amount of wages eligible for the credit, and that would ease the standards used to determine whether an organization is eligible for the ERC. Due to the complexities involved, it is important to consult your tax professional to better understand your position relative to the availability of the credit, as well as the accuracy of calculations.
For More Information
For more information on how your organization can take advantage of the ERC, please contact us.
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Nate Smith is a Director in the CBIZ National Tax Office. He can be reached at 727.572.1400 or email@example.com.
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