The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed by the United States Congress on March 27, 2020. This economic stimulus bill was created in an effort to help American taxpayers who suffered economically from the fallout as a result of the coronavirus pandemic.
The CARES Act legislation included a provision for small businesses, including nonprofit organizations, to receive employee retention credits to help ease the entity’s payroll tax burden and to help mitigate the negative impact of the pandemic on the organization’s activities.
The Employee Retention Credit (ERC) allows employers who meet certain eligibility requirements to take up to a 70% refundable credit on qualified wages (which in some cases can include health care costs). Up to $10,000 per employee of wages are eligible for the refundable credit.
This is an increase from a 50% limit when the legislation was originally issued in March 2020. The credit may be claimed for wages paid after December 31, 2020 through June 30, 2021. Wages paid between March 27, 2020 and December 31, 2020 would be eligible at the 50% rate. The maximum credit per quarter during 2021 would be $7,000 per employee.
In order to qualify for the ERC a nonprofit organization must have been in business during 2020 and experienced one of the following circumstances:
The period of significant decline continues through the first day of the calendar quarter following the calendar quarter where gross receipts exceed 80% of total gross receipts for the same quarter in 2019 (or 2020).
When the CARES Act legislation was originally released in 2020, organizations were not allowed to receive both the ERC and loans from the Paycheck Protection Program (PPP). Recent legislation has been updated to allow nonprofits to receive both Employee Retention Credits and funding from the Payroll Protection Program.
The legislation is effective retroactive to March 27, 2020.
This means that nonprofits that received Payroll Protection Program loans during 2020, which were not originally eligible for ERCs, may now go back and evaluate their eligibility for this option. The wages must not be treated as payroll costs when obtaining forgiveness for the Payroll Protection Program in order to receive the credit.
Wages for purposes of the ERC are determined based on the size of the organization. For organizations with less than an average of 500 full-time employees, all wages paid to employees during the period of decline in gross receipts are considered to be eligible (with a limit of $10,000 per employee). This also applies to any period in which the nonprofits’ activities were halted partially or fully due to COVID-19 related mandates. The number of employees is based on 2019 data.
For organizations with greater than an average of 500 full-time employees, the qualified wages will depend on whether individual employees provide services as a part of their duties. Wages for employees who provide services during the period of decline in gross receipts or suspension in operations are not eligible for the credit.
Employers may apply for the ERC in one of two ways:
Employers with greater than an average of 500 full-time employees are not eligible for the advance credit.
Understanding the rules related to the CARES Act relief provisions are complex. The recent legislation which updated many of the rules surrounding eligibility and receiving COVID-19-related relief can be even more confusing.