Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), companies or organizations that were shut down or suffered a 50% reduction in revenue due to a COVID-19-related federal, state or local government order are eligible for a refundable payroll tax credit of up to $5,000 per employee for 2020. This includes monies spent to maintain group health plan coverage.
In March 2021, the American Rescue Plan Act expanded the availability of the Employee Retention Credit during all four quarters of 2021 with a refundable payroll tax credit of up to $28,000 per employee ($7,000 per quarter).
Employers, including tax-exempt organizations, are eligible for the Employee Retention Credit (ERC) if either of these situations applies:
- Operations were at least partially suspended between March 13, 2020, and December 31, 2021, due to a government order limiting travel, commerce, or group meetings due to COVID-19; or
- The organization experienced a significant decline in gross receipts in any calendar quarter during 2020 or 2021 compared to the same quarter in 2019 (“significant decline” is 50% in 2020 and 20% in 2021).
Churches cannot claim the ERC for wages paid to pastors or clergy since they are exempt from federal employment taxes. In addition, the following wages may not be included in Employee Retention Credit calculations:
- Emergency paid sick leave that was funded by the Family First Coronavirus Response Act (FFCRA).
- Leave that was taken under the Emergency Family Medical Leave Extension Act.
- Employer payroll expenses that were covered by a Payroll Protection Program (PPP) loan.
- Qualified disaster relief funds.
How to Claim the Employee Retention Credit
Employers have three options for claiming the ERC:
Reduce tax deposits. Employers eligible to claim the ERC in 2021 can begin immediately to reduce their required payroll tax deposits by the amount of the available credit.
Obtain advance payment. Employers with fewer than 500 employees may obtain an advance payment from the IRS if their employment tax deposits are insufficient to cover their 2021 ERC. To apply, submit IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Claim a credit retroactively. Using their quarterly federal tax return (IRS Form 941), employers may claim the ERC for 2020 and 2021 by reporting the total qualified wages and related health insurance costs for each applicable quarter. For quarterly returns that have already been filed, employers can claim the ERC retroactively by using IRS Form 941-X.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 245-3177 or reach out to us through our contact page.