While the Payroll Protection Program in the CARES act has received a lot of attention (and funding), there is another benefit available to churches and small businesses called the Employee Retention Credit. Organizations that received a PPP loan are not eligible for the Employee Retention Credit. So, if your ministry didn’t apply for, or receive, a PPP loan, there is still financial assistance available.
The CARES act provides a payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. Rules exist to determine total wages and eligible employees. The credit is provided for the first $10,000 of compensation, including health benefits, incurred or paid to an eligible employee between March 13, 2020 through December 31, 2020.
The refundable Employee Retention Credit appears to be a worthy option for businesses which did not want to incur debt even with the promise of potential loan forgiveness. The credit is designed to help prevent layoffs and keep workers employed. Businesses (including tax exempt organizations) who furloughed or reduced their workforce, or any business with a 50% drop in gross receipts (compared to the same quarter of the previous year) because of the Covid-19 emergency, may qualify for this refundable credit.
According to the IRS, “Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer's employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.”
The amount of the credit is based on the size of the organization.
The 50% credit is computed for the first $10,000 of compensation (including a portion of the employer provided health benefits) paid to each eligible individual as wages and reported on the 941 from March 13, 2020 to December 31, 2020. Therefore, the maximum credit is $5,000 per employee.
Eligible employers claim the credit on the quarterly Employer Payroll Form 941 against their employment tax liabilities for that quarter. This is a refundable credit when the allowed credit exceeds the employer’s quarterly liability.
The IRS provided the following instructions for claiming the credit:
- In order to claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, on the Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer's share of social security tax but the excess credit is refundable under normal procedures.
- In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act (PDF).
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Important Note: Employers receiving the Small Business Interruption (PPP) loans through the SBA do not qualify for this credit, whether the loan is forgiven or not. Employee wages paid for family or sick leave under the Families First Coronavirus Response Act, or Work Opportunity Tax Credit, also do not qualify for the Employee Retention Tax Credit.
For more information about filing Form 7200, see this IRS Tax Tip.
Esther Axmark, staff internal auditor for the General Council of the Assemblies of God, has worked with minister’s and missionary taxes and financial reporting for over 40 years while ministering with her husband in the Springfield Missouri area and working with Assemblies of God World Missions.
Rollie Dimos, CIA, CISA, CFE, is the Director of Internal Audit and the Center for Leadership and Stewardship Excellence at the AG National Office. As an auditor in the government and nonprofit sectors, Rollie has been helping leaders assess the strength of their organizational controls for over 25 years. If you have a question about this article, you can contact Rollie at firstname.lastname@example.org.