If you own a nonprofit business, you might wonder whether or not you qualify for the Employment Recovery Credit (ERC). Specifically, you should know that if you meet certain requirements, you may be eligible to receive a one-time tax credit of up to 35 percent of your unadjusted wages paid to employees for up to six months. However, you will not qualify if you pay your employees less than $10,000 per year in wages.
Qualified wages are limited to $10,000 per employee
Qualified wages are defined as wages that employees receive during periods of financial distress. They include health care costs and pre-tax employee contributions. This limit is applicable on a per quarter basis. In addition, employers must also exclude any payroll expenses from qualified wages. A tax professional may be needed to determine the amount of health care costs and pre-tax employee contributions.
The CARES Act of 2020 expanded the definition of qualified wages. It allows severely financially distressed employers to treat all wages paid during the third and fourth quarters of 2021 as qualified wages. However, only those wages that are a result of an economic hardship will qualify for the credit. Those employers with gross receipts of less than 10% of comparable quarters in 2019 or 2020 may be eligible.
Businesses that have closed or are deemed non-essential during a government shutdown are eligible for the credit. Organizations with less than 500 full-time employees can also claim the credit. Larger organizations, however, must exclude any payroll costs from their qualified wages.
Businesses can apply for the ERC through Form 941-X, which is an amendment to their payroll tax filings for the prior-quarter. During the early pandemic period, roughly March through June 2020, they must file for the credit before December 31, 2020. There is a cap on the credit, which is $10,000 for each quarterly period.
The Relief Act of 2019 added a new provision. It raised the threshold for claims for the 2020 fiscal year. Previously, it had been limited to a 50 percent credit. With the new legislation, the credit can now be up to 70 percent.
Additionally, the Consolidated Appropriations Act of 2021 added an increase to the credit, allowing it to be claimed for calendar quarters beginning after December 31, 2020. Ultimately, this means that employers can claim a maximum of $21,000 for their employees in the year 2021.
The Relief Act also increased the number of claims that nonprofits can make for the 2020 fiscal year. In addition, it made it possible for some businesses to apply for a refundable credit against Social Security taxes.
Part-time employees are not counted in the determination of Large Employer status
It may surprise you to learn that part-time employees are not counted in the determination of Large Employer status for nonprofit organizations. However, this could lead to a lot more nonprofits having 500 or fewer full-time employees.
Full-time employees are defined as individuals who work an average of at least 30 hours per week. Additionally, they must work at least 130 hours each month. They must also report their hours of service to the IRS. If an employer has more than 50 full-time employees, it must follow employer shared responsibility rules. These rules apply to employers that have employees working in the U.S. and abroad.
The IRS uses a number of methods to determine Large Employer status. One of them is to calculate the average number of full-time and part-time employees in the prior calendar year. This is done by adding up all full-time and part-time employee hours in a given month.
For example, Company X had an average of 150 full-time employees on business days in the previous calendar year. As such, it is an ALE. On the other hand, Corporation Y has an average of 40 full-time employees on business days in the same period. Therefore, Company Y is a large employer for this year, because of its combined full-time equivalent employees.
A similar calculation is made for seasonal workers. Seasonal employees include retail workers during holiday seasons, agricultural laborers, and other workers. Again, the ACA does not require part-time employees to receive health coverage.
However, if an ALE is not offering affordable health insurance to their employees, it could be subject to a tax penalty. That is why the Affordable Care Act included a “shared responsibility” provision. In order to comply with the mandate, an ALE must offer their employees affordable and minimum value health insurance. Moreover, they must submit Form 1095-C to the IRS.
Another measure of a Large Employer’s stature is its ability to claim the Employer Shared Responsibility (ERC) credit. ERC credits are available to eligible nonprofit organizations with 500 or fewer full-time employees.
CARES Act legislation allows nonprofits to receive both the ERC and loans from the Paycheck Protection Program
CARES Act legislation was introduced by Congress to provide assistance to severely distressed sectors of the U.S. economy. It includes emergency relief, debt guarantee authority, taxpayer protections, and more. The legislation also provides for a loan forgiveness program.
This loan forgiveness program is designed to be used in addition to the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). The ERC is a refundable credit against certain payroll taxes. Businesses can claim the credit against 50% of wages paid up to $10,000 per employee per quarter. Generally, the credit will include the pretax amount of employer-paid wages, but may not include the after-tax amounts.
The ERC was initially available for wages paid in 2020. However, in 2021, eligibility was expanded. In order to be eligible for the credit, businesses must have suffered a qualified business disruption. That means a 20% decline in gross receipts for a single quarter.
New businesses and nonprofits can apply for a grant. Lenders will start processing applications on April 3. Funds will be distributed on a first-come, first-serve basis. For new businesses, the maximum amount of grant funds available is $50,000.
The Paycheck Protection Program is a loan program designed to help businesses cover their payroll taxes. The amount of loans is limited to one-half of the amount of employer payroll taxes due by December 31, 2021. If a business is eligible for a loan, the Administration will continue to guarantee the remaining balance of the loan.
The Employee Retention Credit (ERC) was also expanded. Nonprofits and businesses with operations suspended by a government order are eligible for the credit. Initially, organizations were not eligible for the credit. To qualify, businesses must have a payroll of at least 130 hours per month and employees who work at least 30 hours a week.
There are several ways to calculate the credit. Businesses can claim the credit against qualified wages and health insurance costs. They can also claim the credit against 70% of the wages paid to qualified employees.
Organizations can apply for a loan for a period of up to eight weeks. In the case of nonprofits, the amount of loan forgiveness depends on the percentage of salary reductions.
American Recovery Plan legislation extends the credit period to June 30, 2021
The American Rescue Plan Act of 2021, a $1.9 trillion relief package, includes several tax provisions. One of these is the extension of the ERC program. If your business is severely financially distressed, you can claim a credit for up to $10,000 per calendar quarter. This can be applied to any employees’ qualified wages. However, there are a few rules that must be followed. For example, you must have paid your employees’ health expenses through September 30, 2020. In addition, you must pay your employee’s wages after March 12, 2020.
You can claim the credit for the fourth quarter of 2021, but the cap remains at $10,000. If you have more than this amount, you will be able to claim the excess and receive a refund from the IRS. However, you will have to report the additional amount on your Form 941. Finally, you can only take this credit on wages that are not forgiven under the PPP. Fortunately, this change will not change the overall credit amount. So it will be worth your while to check your qualified wages.