What Nonprofits Need to Know about the Employee Retention Tax Credit

Key Takeaways:

• • Many nonprofits qualify for the employee retention tax credit (ERTC)

• • You need to have at least one employee and meet qualification requirements to get ERC for nonprofits, including:
    • • You had to close fully or partially in 2020 or 2021 because of a government order related to the pandemic, or
    • • Your gross receipts in 2020 had to be at least 50% less than the same quarter in 2019 and 20% less in 2021 when compared to the same 2019 quarter

• • Small businesses with 100 employees or less in 2020 and 500 or less in 2021 can include all qualifying wages paid, while large businesses can only include wages paid to employees not providing services

• • Use Form 941-X to amend your original payroll tax return for the applicable quarter

• • Submit your form to claim the ERTC within three years from the date of the original filing or two years from when you paid the tax, whichever is later

• • Nonprofits can potentially receive up to $5,000 per employee per year in 2020 and $21,000 per employee per year in 2021

• • You can claim the ERTC if you also received a PPP loan during the pandemic

Small businesses of all kinds experienced significant challenges because of the COVID-19 pandemic. Many had to close temporarily, some for good, because of gathering restrictions or revenue loss. New legislation and economic uncertainty meant that many businesses had trouble staying on top of considerations like tax preparation and financial health.

Nonprofit organizations were no different, with more than a third of nonprofits at risk of closing within the next two years because of financial problems brought on by the pandemic. Nonprofits face unique challenges, especially as they consider how to continue supporting their communities with services that will make a difference.

Relief initiatives like the employee retention tax credit (ERTC) served to help employers and nonprofits keep their people on the payroll and stay successful. This credit was first introduced in 2020, and you still may be able to claim it now as a nonprofit.

Claiming ERC for a nonprofit could mean hundreds of thousands of dollars for your nonprofit. You could, in fact, receive a cash payment from the IRS of up to $26,000 per employee. 

It’s worth understanding the eligibility requirements and how you can still claim this tax credit even though the program ended in 2021. This guide discusses everything nonprofits need to know about the ERTC and the steps to receive the credit retroactively.

Do Nonprofits Qualify for the ERTC?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) first introduced the ERTC and was passed in March 2020. This credit was then expanded and extended by the American Rescue Plan Act in 2021, and it ended for most businesses on September 30, 2021. 

Businesses that are considered startup recovery businesses may qualify for the last quarter of 2021, however. These businesses had to have started operations after February 15, 2020, and have gross receipts of less than $1 million.

Many nonprofit organizations may be eligible for the ERTC. They just have to meet the qualification requirements like other types of businesses. These requirements include:

• • Must have fully or partially shut down operations because of a government order during 2020 or 2021, or

• • Must have experienced a decrease of 50% or more in gross receipts in 2020 when compared to the same quarter in 2019 or a reduction of 20% or more in 2021 when compared to the same quarter in 2019

They must have had at least one full-time employee during the eligibility period. There are no size limits for employers to claim the ERTC. 

However, large employers can only claim wages paid to workers when they weren’t providing services because of a COVID-related reason or closure. A large employer is considered to have more than 100 full-time employees for 2020, and for 2021, a large employer has more than 500 full-time employees.

There’s a lot of misunderstanding about whether nonprofits qualify since they don’t pay income taxes as a 501(c)3 organization. Any nonprofit that meets all wage and employer requirements, however, is eligible for any qualifying quarters of 2020 or 2021. This credit is meant to help with payroll taxes nonprofits do have to pay.

Key Facts about the ERTC for Nonprofits

Nonprofits that qualify for the ERTC need to know a few other facts about the credit before moving forward, including important limits and what form to use. Here are a few additional points to remember as you’re preparing to claim the ERTC:

Wage Limits 

The ERTC for 2020 has a limit of $10,000 in wages per employee per year, and the credit has a limit of 50% of those wages, so the maximum credit for 2020 is $5,000 per employee per year. 

In 2021, the qualified wages limit is $10,000 per employee per quarter, and the limit was increased to 70%. So, you could get up to $21,000 per employee per year (or $7,000 per employee per quarter) and startup recovery businesses could get up to $28,000 per employee for 2021.

When to Claim the ERTC

The ERTC ended in 2021 for all types of businesses, but you can still claim it if you qualify and didn’t do it yet. You have three years from the initial date you filed the applicable tax return or two years from the date the payroll tax was paid, whichever is later.

IRS Form 941-X

Nonprofits that didn’t include the ERTC on their original quarterly tax return, which is Form 941, can use Form 941-X to claim the credit retroactively via a tax return amendment. 

PPP Loan Recipients

Businesses initially couldn’t claim the ERTC if they received a Paycheck Protection Program (PPP) loan, but the Consolidated Appropriations Act (CAA) in 2021 changed that. This means that if your nonprofit did receive a PPP loan, you can still claim the ERTC. You just can’t use both the ERTC and PPP for the same employment costs.

Refundable Tax Credits

The ERTC is a refundable credit, meaning you will get a cash payment from the IRS for the credit that remains after your payroll tax liability is taken care of. This is significant since most credits are nonrefundable and only cover your tax liability.

Types of Organizations Under the CAA

The CAA from 2021 specified that more organizations could claim the ERTC, including healthcare organizations, public colleges and universities, and Congress-chartered organizations.

All these requirements and terms can be hard to follow. Determining your eligibility, however, could mean tens or even hundreds of thousands of dollars for your nonprofit. Talk to an ERTC professional if you’re not sure about moving forward.

5 Steps to Claim the ERTC for Nonprofits

You always want to make sure you follow the correct process so you don’t make a mistake or risk a penalty from the IRS. Here is a look at everything you need to do to begin claiming the ERTC in five simple steps:

1. Determine Eligibility

Make sure you qualify before you proceed with claiming the ERTC retroactively. Read all the above requirements. You may only qualify for certain quarters of 2020 or 2021 based on your nonprofit’s operational status and how much you lost in gross receipts.

2. Use IRS Form 941-X

You’ll need to use Form 941-X, Amended Quarterly Payroll Tax Return, to amend your original Form 941. This form allows you to state the exact amount of your credit alongside the qualified sick and family leave wage credit, if applicable. 

You don’t need to include backup documents to support your claims to the IRS. You’ll only need to show that proof if they decide to audit you later.

3. Calculate Qualifying Wages

Next, figure all the wages that qualify based on qualifying quarters of 2020 and 2021 and wages. Remember that small nonprofit employers can claim wages paid to all employees, while large employers can only claim wages paid to employees not providing services.

4. File Form 941-X by the Deadline

Don’t miss your window to retroactively claim the ERTC. You could potentially have until 2024 to claim it. Make sure to send Form 941-X within three years from when you filed Form 941 or paid the payroll tax, whichever is later. 

5. Wait for Your Refund

Now, it’s time to wait. Sometimes the refund checks take many months to arrive, so don’t be alarmed if you still haven’t received your refund. You’ll receive whatever amount of your credit is left over after your payroll tax liability has been covered.

Get started with this process now so you get your refundable credit as soon as possible. The IRS sometimes gets backed up, which was exacerbated by the pandemic, so it could take longer than usual to receive certain tax benefits. 

Talk to an ERTC expert if it’s been a long time and you still haven’t received your credit to make sure you did everything correctly.

ERTC Pitfalls for Nonprofits to Avoid

Following all requirements and understanding your eligibility will help you get your tax credit faster. Many nonprofits, unfortunately, run into challenges and confusion during the process. It can be especially difficult to do everything right when laws keep changing. Avoid these pitfalls for your nonprofit:

• • Ask your tax professional the right questions about the ERTC. You should know whether your nonprofit claimed the ERTC in 2020 or 2021 and if not, whether you had eligible quarters. They will help you understand your situation and advise whether you should claim the ERTC now.

• • Ensure your information is accurate. The IRS will send your refund check to the address you provide, so be sure to check that for accuracy. Double-check your math so you’re not submitting your form with errors, however trivial they may seem.

• • Respond to any IRS notices right away. Chances are, you won’t hear anything back from the IRS about your tax return or your amendment regarding the ERTC; you’ll probably just receive the cash payment. However, if you do receive a notice or an indication that you’re being audited, don’t ignore it. Follow all instructions provided carefully and stay in communication with the IRS.

• • Never lie to the IRS. Everything you provide them needs to be honest and accurate. Your nonprofit needs to always stay in good standing with the IRS, so make sure you file your quarterly tax returns on time, too.

• • Pay attention to changing laws. Tax relief initiatives like the ERTC and PPP have technically ended, even as businesses have been trying to rebound from the effects of the pandemic. Make sure you pay attention to any upcoming or passed legislation that impacts your nonprofit and your payroll taxes. These laws change frequently. 

Remember that it’s always wise to talk to an ERTC or tax expert before moving forward if you’re unsure what to do. Nonprofits often don’t have the same on-staff resources as large businesses, so don’t be afraid to get outside help for whatever issue you’re experiencing. 

Contact ERC Today with Questions about Your Nonprofit

The ERTC provides a significant opportunity for nonprofits. You could receive up to $26,000 per employee in total benefits across 2020 and 2021. Nonprofits need any support they can get in covering payroll taxes and continuing to stay afloat.

There are a lot of ERTC terms and requirements, as this guide makes quite clear. It isn’t easy to understand how everything impacts you, especially if you don’t have internal accounting staff. That’s why at ERC today, we’re here to help nonprofits like yours.

Our team of experts answers any questions you may have about the ERTC, including eligibility and the process to claim the credit retroactively. We lead the industry in speed and accuracy and can help walk you through the filing process. We make it easy to start your ERTC application online today. 

Ready to get started? Contact ERC Today for more information about your Employee Retention Credit options.