COVID-19 isn't just a health emergency but a global pandemic that has presented economic difficulties that many never saw coming. Churches, ministries, houses of worship, clergies, and many other non-profit religious establishments have suffered severe financial strain daily. This is why Congress created the Employee Retention Credit, or ERC for short. It serves as a means of helping religious establishments keep their employees when it takes work to do so.
The ERC is a cash refund from normal payroll taxes. Non-profit establishments that saw their gross receipts decline more than 20% when comparing 2021 to 2019 or more than 50% when comparing 2020 to 2019 can be eligible for tax relief. There are multiple ways to qualify. Many religious organizations weren't allowed in-person services during the early pandemic lockdowns. Even when they could let worshippers back in, capacity restrictions limited the size of their congregations. That had a very negative impact on donations and funding in many non-profits.
Table of Contents
- Understanding ERC Tax Credit for Churches and Places of Religious Worship
- What is Employee Retention Credit?
- Establishing ERC Eligibility
- How Does It Interact With Different Pandemic Relief Provisions
- Advantages for Churches and Places of Worship
- Eligibility for Religious Non Profits
- Qualifications for Wages and the Payroll Tax Credits
- Can Churches Claim the Employee Retention Credit?
- Key Takeaways
Understanding ERC Tax Credit for Churches and Places of Religious Worship
If you want to benefit from the ERC, you must know how it applies to religious establishments. That includes the criteria for eligibility and how it interacts with other pandemic relief provisions that your clergy or ministry might have participated in or benefitted from.
What is Employee Retention Credit?
The ERC has proven itself to be a valuable tool that gives eligible employers tax relief in a time of economic need. The COVID-19 pandemic poses economic challenges to many organizations looking to keep their employees, and churches and places of worship have been no exception.
However, if they can meet certain criteria for eligibility, religious organizations can take advantage of the ERC. For example, if a non-profit religious establishment suffered enough decline in their gross receipts for certain quarters, they might qualify. Another way to establish eligibility is if they went through partial or full suspensions of their operations due to government mandates resulting from the pandemic.
Establishing ERC Eligibility
So, are churches eligible for Employee Retention Credit? Knowing the specific ERC eligibility criteria can prove essential for a church or religious establishment that wants to benefit from the potential financial relief available. The following are seven particular factors that might establish the eligibility of your church or place of worship:
- You must be eligible as an employer, but religious organizations, such as tax-exempt churches, can be grouped into this.
- Your establishment must have suffered a substantial decline in your gross receipts, usually 50% or more, compared to a similar quarter from 2019.
- Also, you could qualify if any business activities in your church were suspended partially or fully thanks to government mandates or orders resulting from the COVID-19 pandemic.
- For 2020, available ERC benefits can apply to qualified wages you paid starting with March 12 of the previous calendar quarter up to December 31, right before the calendar quarter. Alternatively, 2021 ERC benefits apply to all four of the year's quarters.
- Specific requirements must be met for employees looking to apply this credit to their wages if they also took out a Paycheck Protection Program or PPP loan.
- For 2020, any employers that have more than 100 full-time people on their payroll only get ERC for employees still getting paid while not working. For 2021, the number goes up for employers that don't have as many full-time employers and more than 500 full-time personnel.
- Churches and other religious non-profits with gross receipts of under $1 million during a comparable quarter of the prior year might also qualify.
You need to understand these eligibility rules clearly, whether you're a church leader or religious organization administrator or an owner of a small- or medium-sized business. Consult a qualified accountant or tax professional when necessary before you claim the ERC benefits on your Form 941 filings.
How Does It Interact With Different Pandemic Relief Provisions
The ERC is only one of many pandemic relief provisions that churches and religious establishments might take advantage of. You should know what these relief measures are and how they interact with one another so you can get the most financial relief for your place of worship.
For example, if your organization got a PPP loan, then it might influence the level of ERC benefits that you are eligible for. You can't claim this credit on any paid wages using PPP loans.
You should also note that even though PPP loans can be forgiven under some circumstances, ERC benefits provide immediate cash refunds via payroll tax deductions. You never have to repay them.
Suppose you want to make educated choices about the specific pandemic relief programs that work best for your religious organization. In that case, you need to consult an accountant or appropriate tax professional who knows the proper rules and regulations.
Advantages for Churches and Places of Worship
The ERC lets your religious organization access financial relief because of the pandemic. That helps your church or place of worship keep your employees by providing payroll tax refunds.
Offering Financial Pandemic Relief
The ERC is a badly needed financial benefit to religious places of worship struggling due to the pandemic. Eligible employers can get a cash refund of payroll taxes that helps them keep employees on their payroll and lets them maintain service levels to their local communities.
Small- and medium-sized religious organizations are usually non-profit establishments that have limited resources. That means they are hit particularly hard by the economic hardship of the pandemic, and the ERC relief is a true lifeline. When a church or place of worship can get assistance in covering the wages they pay employees through the ERC, these establishments can keep their operations going and honor their missions when their community service might be needed the most.
Keep Your Employees and Ability to Serve Your Community
The ERC offers financial relief to non-profit religious organizations impacted by the pandemic. When you can retain your personnel, you can keep serving your community in ways that matter.
Churches and places of worship might get credits as high as 50% on employee wages to retain their professional talent during hard times. This credit can be taken advantage of by religious organizations that have gross receipts under $1 million compared to the prior year. The benefit applies to any eligible wages you paid until 2021.
Payroll Tax Cash Refunds
The ERC provides serious financial benefits for religious non-profits impacted by the pandemic. This credit can be cash refunds via the payroll tax so that eligible employers can keep their personnel and remain able to serve their communities.
Churches and places of worship can get up to 50% back on qualified employee wages, up to $5,000 per 2020 employee. The ERC remains available for 2021, but the maximum credit amounts and eligibility criteria differ.
A religious non-profit with gross receipts of under $1 million during the prior year can establish eligibility for this precious tax act relief measure.
Eligibility for Religious Non Profits
In order to qualify for the ERC, religious non-profit establishments need to do three things. First, they need to fall under the category of tax-exempt status per Section 501(c)(3) of the Internal Revenue Code. Second, they must pay wages to employees where federal payroll taxes apply. Third, they must also establish a reasonable basis for ascertaining qualified wages.
Concerns About Separation of Church and State
Many religious establishments might have concerns about how the separation of church and state impacts claiming ERC benefits. These concerns are certainly understandable. However, ERC eligibility criteria are based on financial factors. Religious activities and affiliations don't matter.
Also, a church or place of worship can claim the credit without getting special treatment. The ERC benefits are open to any business or non-profit that was impacted by the pandemic and government mandates.
Organizations of any status or purpose, non-profit or otherwise, should consult with a tax accountant or professional to make sure they are within the proper guidelines for taking this credit.
Employee Compensation in Tax-Exempt Status
To get ERC benefits, churches and places of worship must fall under the tax-exempt category as laid out by the Internal Revenue Code. It's crucial to note that these credits are only applicable to employees who have their wages subject to payroll taxes at the federal level. That includes Medicare and Social Security taxes.
Non-profit religious organizations need to make sure that they pay employees appropriately and report the compensation accurately on the annual W-2 forms.
To ascertain how much credit is available, your organization can use a benchmark that applies qualified wages paid starting March 12, 2020 until the end of December 31, 2021. The third and fourth quarters and all four quarters of 2021 apply in full, along with several weeks of Q2 2020.
The qualifying wages can include hourly wages or salary, but they can't include life or health insurance premiums.
Consulting a tax accountant or professional can help your church or house of worship with two things. First, you can get help to ascertain your eligibility. Second, you can make the most of the possible tax benefits.
Calculating Your Maximum Potential Credit
To figure out your eligibility and how much credit might be available through the ERC, consider two different factors. One is your religious organization's gross receipts. The second is your qualified wages.
The ERC can be as much as 50% of eligible employee payroll with a ceiling of $5,000 for each 2020 employee. On the other hand, the 2021 ceiling is $7,000 for each employee per quarter.
Also, eligible religious employers have to factor in their gross receipts. That is the total revenue you had come in minus allowances or returns during particular quarters. For qualification for the 2020 ERC, your church or place of worship had to either experience one of two things. First would have been a partial or full suspension of your operations because of government mandates. The second would be a serious decline in your quarterly gross receipts when you compare them to a similar 2019 quarter.
Non-profit religious organizations that are tax-exempt establishments with gross receipts under $1 million per year could get tax credits for their qualified wages that were paid during periods where they had lessened activities even if they weren't totally shut down. Adherents of many faiths didn't get out much during the pandemic for safety reasons. As a result, church attendance was not what it was before the pandemic, even when lockdowns or social-distancing measures weren't in place.
Qualifications for Wages and the Payroll Tax Credits
To qualify for ERC benefits, religious organizations must pay employees eligible wages from March 12, 2020 through December 31, 2021. That includes compensation for some kinds of health benefits and time worked.
Eligible Payroll Wages
ERC qualification happens for churches and places of worship if they pay eligible wages to the people working for them. For wages to be qualified, they must meet particular criteria. Most importantly, the wages were paid in a period starting March 12, 2020 and ending December 31, 2021.
For instance, wages might be deemed eligible if they were paid to a particular employee who wasn't actively working because of a partial or full shutdown.
You need to know that credits apply to wages as high as $10,000 for each employee per quarter during 2021. If you have an employee that made more than that during the quarter, the credit calculations only factor in the first $10,000 but nothing after that.
Employers need to maintain precise records of all their payroll tax filings and deposits, given how they might impact possible ERC refunds in the future.
ERC Interactions With Other Available Tax Deductions and Credits
The ERC is something that your religious non-profit can use with other available tax deductions and credits. Having said that, you can't count the same wages for both the PPP and ERC. You also can't combine these with the paid leave credit offered by the Families First Coronavirus Response Act, also known as the FFCRA.
In such instances, employers must decide which particular benefits they use on their employees wages. Also, eligible ERC expenses are something other than what you can also use for general tax deductions.
You must know how these programs interact with one another so you can make the most of the available financial relief while minimizing the possible conflicts.
Can Churches Claim the Employee Retention Credit?
Yes, to get the ERC, churches, and places of worship have to file Form 941 for their quarterly payroll taxes. They might also be eligible to receive retroactive credits for prior quarters. Keep reading to learn more about that.
Filing Form 941 for Your Quarterly Payroll Taxes
To get the ERC, an eligible religious organization has to file Form 941 as part of its quarterly process of payroll tax returns. Use this form to report the wages you have paid employees, tips they have received, and taxes you withheld throughout the quarters.
For example, if your non-profit religious organization has fewer full-time personnel than earlier, you might still have ERC eligibility due to other factors. One could be a substantial decline in gross receipts across two comparable quarters of different years. It's worth it to consult professionals to learn how to qualify for the credit, and how much you can get, and then file the proper paperwork to access your potential tax refunds or payroll tax offsets.
Get Credits Retroactively for Prior Quarters
On top of getting credits for future and current quarters, any religious non-profits that are eligible can also get credits retroactively for prior quarters. If your organization was previously eligible, but you didn't claim credits during those quarters, then you adjust the previous payroll tax filings before getting either cash refunds or offsets against future taxes.
For instance, assume a certain example. Consider that your church might have been eligible for $10,000 of ERC benefits for payroll wages you paid in April, May, and June of 2020. However, you still need to file Form 941 by the September 30th deadline later that year. You can still submit your adjusted form at this point in time and still get the total amount you are eligible for as a refund.
One crucial thing you should know is that retroactive credit claims need to happen within three years after filing the associated tax return in the first place.
Making Adjustments to Forms You Already Filed
You might be in a situation where you already filed your Form 941 and still want to go back to the ERC. Fortunately, that's possible. You need to adjust any previous forms to get the credit on a retroactive basis. If you filed Form 941 for a relevant quarter or quarters but didn't claim the credits, then you can do so with an amended Form 941-X.
While it's great that this is possible, you should also ensure that you do it seriously. Amending forms that are already filed is a complicated situation. Get help from an appropriate accountant or qualified tax professional. This is the best way to claim any credits available to your house of worship or religious organization without triggering penalties or errors that might reduce your benefits.
The ERC is an essential resource that places of worship can use. In doing so, they can keep up their service to their communities during difficult times. Retaining employees, thanks to federal financial relief, goes a long way toward accomplishing all of this.
Houses of worship are often lifelines to the communities that they are a part of, and that's why the ERC is a crucial option for churches and other religious organizations during the pandemic. Eligible employers can benefit from this credit and keep up their operations, ranging from social programs to food banks.
The pandemic isn't just a health threat but an economic one, where furloughs and layoffs are always risks. Churches and other non-profit organizations can use ERC benefits to maintain their services to struggling local people and families.
Schedule a consultation with an ERC specialist to see if you qualify and to learn more about the potential benefits. Check out our list of the best ERC professionals and firms.