Nonprofit eligible employers include churches and other nonprofits that were directly affected by the pandemic—in relation to government restrictions or to precipitous decreases in gross receipts in both 2020 and 2021.
But while many businesses qualify for the ERC, sorting out eligibility in relation to employee retention and nonprofits and determining which wages apply is challenging.
It gets even harder to know what rules apply to which type of nonprofit, especially as deadlines start to loom and you just want to get your claim right.
Follow our guide as we walk you through the ERC-nonprofit information, including eligibility, qualified wages, 2020 vs 2021 limits, and more! We can always discuss your situation in further detail if needed.
Employee retention and nonprofits: The ERC explained briefly
The federal government established the ERC tax credit to help businesses with the cost of employing staff throughout the financial downturn caused by the pandemic.
Those businesses that suffered a decline in gross income or that closed as a matter of government order are entitled to this employment tax credit, and those that didn’t claim the credit in their original returns have a limited opportunity to do so now.
The process involves filing a 941-X – or Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund – for those 2020 and 2021 quarters for which your nonprofit qualifies.
Where does the employee retention credit go on Form 990?
The ERC is entered on IRS Form 990, which is the Return of Organization Exempt from Income Tax. You’ll enter your ERC in Part VIII of this form, which is the Statement of Revenue, and you’ll use Line 1e for the amount you received in government grants for the year.
(Additional reading: is the employee retention credit taxable income?)
Firstly, does the employee retention credit apply to nonprofits?
Yes, the employee retention credit applies to nonprofits, as it does to all businesses that continued to pay their employees while closed. This closure had to be in response to the pandemic and significant losses in gross receipts from March 13, 2020, to December 31, 2021 had to be seen.
As with all-things-legislative, there are certain eligibility criteria you need to meet and nuances you need to be aware of.
Eligibility requirements for nonprofits
Determining eligibility for nonprofits requires a two-pronged-test approach:
Government mandate test
Gross receipts test
As determined by the government mandate test
If your nonprofit endured a complete or partial shutdown as a result of a government order during the pandemic, you qualify as an eligible employer for the period that you paid qualified wages during that government-ordered shutdown.
This is true if your nonprofit was shut down completely or your group meetings, commerce or travel were limited according to governmental authority.
Common examples include if:
Your employees were required to work from home as a matter of local or state order
Mandates related to capacity limitations on public or private venues required the canceling of a pre-planned event
Your nonprofit was shut down in response to a restriction on public gatherings, such as church services, weddings or other religious events
Restrictions on school hours directly affected your nonprofit
As determined by the gross receipts test
If your nonprofit endured a significant decline in gross receipts during the allotted financial quarters, it likely qualifies as an eligible employer for ERC.
The determinative amount is a 20% reduction in gross receipts for the first, second and third financial quarters of 2021 in relation to the corresponding quarters in 2019.
However, the eligibility requirement for 2020 is a 50% reduction in gross receipts over the corresponding quarter in 2019, which makes it far more challenging to meet.
What are gross receipts for a nonprofit for ERC?
The IRS identifies gross receipts as the amount the nonprofit raises from all sources in a fiscal year prior to any costs being subtracted. Because one of the qualifiers for the ERC is the gross receipts test, it’s important to understand what is included in this accounting.
For nonprofits, all the following fall into the category of gross receipts:
Contributions, gifts or grants
Gross sales or business activities
Dues or assessments from the enterprise’s members or affiliated organizations
Investment income, including rents, interest, dividends and royalties
Sale of assets, without reduction for sale-related expenses
Nonprofit ERC enhanced benefits
Those nonprofit organizations that are deemed “eligible employers” and that had 100 or fewer full-time employees in 2020 are entitled to the ERC’s maximum benefits for that year.
In 2021, this rule was expanded to include all eligible religious and nonprofit organizations that had 500 or fewer full-time employees.
In Conjunction with PPP
While participation in the Paycheck Protection Program (PPP) initially prohibited any ERC claims, this was resolved in late 2020 with the Consolidated Appropriations Act.
Since this act enhanced and extended the ERC’s reach, nonprofits that received PPP loans are no longer exempt from the ERC.
Check our complete employee retention credit and PPP guide for more info on this!
Can churches get the ERC?
Yes, churches get the ERC because most churches file quarterly 941 forms, which the ERC is based upon. Churches that qualify under the gross means test or the government mandate test are generally eligible for ERC, but every situation is unique, and churches can face additional complications.
The credit rate for churches and other nonprofits
The credit rate that churches and other nonprofits experience through the ERC varies between 2020 and 2021.
The 2020 credit
The maximum credit for qualifying quarters in 2020 is 50% of each employee’s qualified wages up to $10,000 per quarter, which includes health care that’s paid for by the employer. As such, the maximum credit per quarter in 2020 is $5,000 per employee.
The 2021 credit
The maximum credit for qualifying quarters in 2021 is 70% of the employee’s qualified wages, up to $10,000 per quarter, which includes health care that’s paid for by the employer. So, the maximum credit per quarter in 2021 is $7,000 per employee – or a maximum of $21,000 per employee per year.
Determining if your church or nonprofit is eligible for the ERC is complex, and determining the amount of credit you’re entitled to is similarly challenging.
Errors in either category can lead to audits, claims of tax noncompliance and penalties, which makes working closely with a dedicated California tax attorney to your advantage.
Are clergy eligible for the employee retention credit?
Wages paid to ministers and other clergy are not eligible for the ERC, but churches still benefit in relation to the pay other employees earn. The only requirement if your church is eligible is that you timely file the 941-X, which the IRS has five years to audit.
A note about government authority
Many churches and other nonprofits would, understandably, prefer less government intervention, and many harbor the mistaken belief that claiming the ERC subjects them to more government oversight than they experienced prior.
The truth is that seeking the ERC that you’re entitled to will not alter the government’s reach in relation to your nonprofit enterprise in any way.
You’ll need to continue filing your quarterly 941s just the way you always have, but claiming your ERC credit does not include a requirement that you begin filing yearly tax returns.
Employee retention credit and nonprofits: Steps forward
Once you’ve established eligibility for your nonprofit, you’ll need to take three primary steps forward to reap the benefits of the ERC.
Step 1: Gather the necessary information
To begin, it’s important to gather all the documentation to ascertain your eligibility and to calculate the credit amount to which you’re entitled:
Tax documents for the timeframe in question that demonstrate your eligibility for ERC, if you’re using the gross receipts test
Relevant quarterly tax returns, which, for a nonprofit, generally means your 941 forms from the applicable business tax quarters
Any health insurance premium payments that you made on behalf of your employees
Step 2: Calculate your credits
Because the guidelines for 2020 and 2021 differ, calculating your nonprofit’s potential credits is that much more complex.
It’s also important to note that the ERC program was cut short by the Infrastructure Investment and Jobs Act, which implemented an early end date of September 30, 2021 – thus eliminating Q4 eligibility in 2021.
Further, since the ERC applies to wages paid from March 13 to December 31 in 2020, all four quarters are eligible, but the credit only applies to the last few weeks of the first quarter.
Qualifying wages for the ERC include all the wages employees received from March 13, 2020, to September 30, 2021, but only compensation that is subject to FICA or that falls into the category of a qualified health expense is relevant.
While receiving a PPP loan does not disqualify you for the ERC, any wages that you paid with your PPP loan can’t be included in your ERC calculation, further complicating an already very complicated matter.
Number of employees
Employee retention credits also vary in accordance with the number of employees you have, and the specifications vary from 2020 to 2021.
The maximum credits apply only to those enterprises that employed fewer than 100 employees in 2020 and fewer than 500 employees in 2021.
Step 3: File
Eligible nonprofits are allowed to retroactively claim employee retention credits for up to 3 years after filing their qualifying 941s. This translates to deadlines for your 941-Xs that are quickly approaching.
While the opportunity to file for the first quarter of 2020 has already come and gone (April 30, 2023), only a couple of weeks of that quarter were covered.
There’s still time to seek an ERC for the last three quarters of 2020 and the first three quarters of 2021, and acting quickly is well advised.
A trusted California tax attorney can help
If you have questions or concerns related to employee retention and nonprofits, it’s time to reach out for the skilled legal guidance of the accomplished California tax attorneys at Brotman Law.
Your church or nonprofit may be entitled to an ERC, and while the process is exacting, the rewards can be considerable. Learn more about maximizing your employee retention credit by contacting or calling us today.