Guide to Employee Retention Credit for Religious Groups: Churches and Non-Profit Organizations
October 28, 2021
*This article was updated on November 15, 2021
The Employee Retention Credit (“ERC”) is a cash refund through payroll tax that is available to churches and non-profit organizations that:
- were affected by government orders imposing capacity restrictions on services and other gatherings; or
- that suffered significant declines in gross receipts.
While many employers have some familiarity with the ERC, confusion exists around the qualifications and application processes.
ERC Overview
Your organization may qualify for four separately calculated ERCs:
- 2020 ERC
- Maximum credit = $5,000 per employee
- Reported on forms 941-X for Quarters 2-4
- 2021 Quarter 1 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 1
- 2021 Quarter 2 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 2
- 2021 Quarter 3 ERC
- Maximum credit = $7,000 per employee
- Reported on Form 941-X for Quarter 3
How Churches and Non-Profit Organizations Can Qualify For The Employee Retention Credit
Government Mandate Test
Tax exempt organizations that experience fully or partially suspended operations due to orders from an appropriate governmental authority to limit commerce, travel, or group meetings due to COVID-19 can qualify as Eligible Employers for purposes of the ERC. The period that the employer pays qualified wages lasts as long as the government mandates are in effect.
Examples that should be considered
- A local or state order requiring employees to work from home
- A restriction on public gatherings (e.g., weddings, church services, other religious events)
- Capacity limitations imposed on public or private spaces requiring the cancellation of pre-planned conferences
- Restrictions on school hours (to the extent the church or religious organization is affiliated with a school)
Gross Receipts Test
In the first, second and third quarters of 2021, to the extent the gross receipts of the organization are more than 20% down from the gross receipts of the organization in the same calendar quarter of 2019, the organization will qualify as an Eligible Employer. The gross receipts decline requirements for 2020 are more difficult to meet due to the requirement to show a greater than 50% decline.
Examples of Gross Receipts
- Includes proceeds from investments and grants
- Not reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold
- Includes any income from investments
- Dividends
- Interest
- Rents
- Royalties and annuities
- Tax accounting method for income recognition applies
Enhanced Benefits
For purposes of the 2020 ERC, religious organizations with 100 or fewer full-time employees (as measured, on average, in 2019) are entitled to the maximum benefits available under the ERC calculations, if they remain an Eligible Employer under either the Government Mandate Test or the Gross Receipts Test. This rule was liberalized for purposes of the 2021 ERCs by increasing the full-time employee threshold to 500 or fewer.
Credit Rate
- 2020 Credit: 50% of the qualified wages (including employer paid healthcare) paid to each employee. Qualified wages are limited to $10,000 per employee.
- 2021 Credits: For the first, second and third calendar quarters, 70% of the qualified wages (including employer paid healthcare) paid to each employee, per quarter. Qualified wages are limited to $10,000 per employee, per quarter.
PPP Loan Interplay
Religious organizations that received Paycheck Protection Program (“PPP”) loans also can qualify for the ERC. When the ERC was first authorized as part of the CARES Act, any organization that received funding under PPP was statutorily prohibited from claiming an ERC. Later, in December 2020, when the ERC was extended and enhanced as part of the Consolidated Appropriations Act, the statutory prohibition against PPP recipients claiming ERC benefits was removed.
Employee Retention Credit Application Requirements For Churches and Non-Profit Organizations
The information that religious organizations need to provide when applying for the ERC include the following:
Number of full-time employees across the organizations associated with the EIN
- Full-Time Employees for 2019
- FTE is an employee that works 130+ hours per month or +30 hours per week
Gross Receipts
- Provide Gross Receipts for each of the qualifying quarters in 2019, 2020, and 2021
Government Mandates
- Consider where you may have been affected by government orders (causing a full or partial shutdown)
- Collect all company locations where government orders may have caused partial shutdown
PPP Loan Documents
- Provide all PPP loan forgiveness documentation to identify what expenses are being used for forgiveness
Wage Data
- Wages for each employee, by pay period, for the period covered by the PPP loan(s)
- Copies of 941 payroll returns for 2020 and 2021
All religious organizations should consider reviewing their eligibility for ERC. Due to the substantial number of government orders limiting the normal activities in 2020 and 2021, many organizations are receiving substantial cash benefits, in addition to PPP benefits already received.
Learn more about the Employee Retention Credit and receive guidance to qualify for the credit by contacting your Cherry Bekaert advisor or Martin Karamon, Tax Principal and leader of Cherry Bekaert’s ERC Services Team.