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Employee Retention Credit for Independent Schools – And Do Private Schools Qualify for ERC Also?

By Justine D.

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You will be happy to discover that independent schools may be entitled to receive Employee Retention Credit (ERC) under the CARES Act and other COVID-19-related legislation. ERC is a payroll tax credit that provides refunds for employers like independent learning institutions that were required to partially or fully suspend activities due to government mandates or particular revenue losses compared to the 2019 fiscal year.

Eligible independent learning institutions can file an amended return if they have yet to do so. The IRS has set deadlines for these filings as April 15, 2024 (2020 ERC), and April 15, 2025 (2021 ERC).

Below are crucial ERC points to consider:

  1. 1
    Employee Retention Credit Eligibility:  Discovering what qualifies a learning institution for the ERC and how it may affect your private school.
  2. 2
    ERC Qualifications and Steps to Take: Learn what it takes for a private school to qualify and how to meet these benchmarks.
  3. 3
    Who Is and Is Not Eligible: You need to know which employees count toward ERC for the learning institution to receive maximum benefits.
  4. 4
    Fulfilling ERC Criteria: Knowing the specific benchmarks required for a private learning facility will facilitate the success of your filed claim.
  5. 5
    Maximize the Institution’s Refund: Claims reaching $26,000 per employee are possible, helping your school get the most out of its ERC refund.

The US government created the Employee Retention Tax Credit as part of the CARES Act in 2020. Many businesses, colleges, hospitals, schools, and 501(c)(3) organizations qualified for ERC refunds when the American Rescue Plan Act was passed in 2021. Additional legislation added entities that filed for PPP loans and other non-qualifying enterprises to potential ERC refund recipients.

Eligible entities must meet one of the following criteria for the calendar month it plans to apply the ERC bonus:

  • The gross income of the employer was notably reduced. 
  • Government mandates forced the employer to reduce operating hours or halt operations. The ERC then covers periods the employer shut down operations or functioned at a reduced capacity to meet these government-enforced edicts.

The IRS released Notice 2021-20 in March of 2021. This notice describes how a business can claim the Employee Retention Tax Credit retroactively, including those that received a PPP loan.

To retroactively claim credits for previous quarters, you must file the Modified Employer’s Quarterly Federal Tax Return or Request in Rebate (Form 941-X). It should cover the periods when you paid out qualifying wages to employees. Several examples demonstrating the process from the IRS are available in Q&A; No. 57.

The Employee Retention Credit is a refundable payroll tax credit available for businesses that kept employees on the payroll during forced shutdowns or operating reductions. It credits 50% of wages up to $10,000 paid out by an employer affected by the COVID-19 government mandates or businesses that experienced more than 50% reductions in their gross revenue for qualified periods.

The organization’s size does not factor into qualifying for the Employee Retention Tax Credit refund. A company has to complete one of the independently computed exams to qualify. The only other alternatives consist of local and state governments or businesses that offer small business loans.

The employer’s operations must have experienced a partial or complete shutdown due to government mandates involving COVID-19 during the calendar quarter in question, or its total gross income was under 50% of the same calendar quarter in 2019. A calendar quarter is no longer eligible for ERC qualification when the employer’s gross income exceeds 80% of the same quarter in 2019.

Do Independent Schools Qualify for ERC?


An independent school will qualify if its gross revenue in the calendar quarter in question is below 50% of revenue compared to the same quarter in 2019. A fiscal quarter for the learning institution loses eligibility once the revenue generated exceeds 80% of that produced in the same calendar quarter in 2019.

The institution had to have classroom restrictions or shutdowns to comply with COVID-19 mandates or experienced a 20% drop in revenue in the preceding quarter compared to the same prior quarter in 2019. In the case of a newly opened school, the IRS will allow institutions to use gross revenues from the first business quarter as a reference point for non-existent quarters from the 2019 fiscal year.

Calculated credit represents half of the eligible wages, up to $10,000. The credit covers money paid to employees from March 13, 2020, through December 31, 2020. You should note that the criteria change for qualifying payments if your organization had more than 100 employees during that time.

Any learning institution that employed more than 100 people on average during the 2019 fiscal year can only use the wages of paid individuals who did not work during those periods when calculating wages for ERC refunds.

The criteria for a school that employed 100 individuals or less is different. In that case, your institution calculates ERC based on all employee salaries, regardless of whether they worked, even in cases where they found a job and got paid (the school gets the credit).

In both scenarios, calculated wages include financial compensation along with things like the cost of health care. You could also get immediate repayment for the credit by reducing payroll taxes collected from paychecks and submitting that to the government.

There is ERC for Private Schools, But What Other Schools Qualify?


When making calculations for the 2020 calendar year, any private school or tax-exempt organization engaged in business may qualify if:


  1. It was forced to partially or completely cease operations during the quarter(s) in question due to COVID-19 government mandates. 
  2. Its total revenues were notably reduced during the quarter(s) in question.

When making calculations for the 2020 calendar year, the criteria for qualifications changed to: 

  1. A notable segment of the employer’s operations must have been discontinued.

In the case of discontinued operations, the IRS has established additional criteria we need to clarify concerning Employee Retention Tax Credit calculations. The discontinued services are insignificant if the total revenue from that segment is less than 10% of gross receipts or less than 10% of the hours of work performed by the employees providing services within the business.

So the Employee Retention Credit for private schools and other schools are valid, if they meet the criteria.

Do Charter Schools Qualify for ERC?


Here is How A Charter School Might Consider Applying

Experiencing a negative impact from the COVID-19 pandemic is not an automatic qualifier for Employee Retention Tax Credit. The industry you operate within, the state, and the business’ circumstances help to determine qualification and ERC refund amounts.

Your institution may qualify for up to $26,000 per employee, but several things influence this, including:

  • The school went into virtual learning.
  • Operated within distancing mandates.
  • Experienced limitation on facility use.
  • Had limitations to student enrollment.

Do Refunds Apply to All?


Bookkeepers, financial institutions, and payroll agencies often provide contrary advice regarding the Employee Retention Tax Credit program created through legislation to address business hardships during the COVID-19 pandemic.

ERC refunds are a crucial part of the billions of dollars earmarked to stimulate the economy by providing refunds to organizations that continued to pay employees during the crisis. Avoid being one of the many schools not claiming this money.

The Qualifications Your School Must Meet


Colleges, clinics, universities, and 501(c)(3) nonprofits stand out among the entities eligible for the ERC refunds after the American Rescue Plan ACT (ARP) passed in March 2021. It followed previous legislation that allowed businesses taking Paycheck Protection Program Loans (PPP) and other non-eligible debtors to qualify for ERC refunds.

There are two scenarios that may have occurred within a financial quarter that could qualify your institution for these tax credits. Your school must have experienced one or both of the following:

  • Federal mandates relating to the pandemic forced a reduction in school hours
  • The school was forced to suspend operations temporarily or permanently.

ERC credits only apply to calendar quarters when the school was closed or experienced reduced operating hours, not the entire fiscal year.

The IRS notes that some schools do not pass the test of reduced hours or shut down because of remote learning. These schools may have shut doors to students but maintained operational capacity by teaching online.

That is where the second test can become a factor, as a school can still qualify due to significant reductions in gross earnings.

The IRS also created a safe harbor that allows schools to exclude the amount of its PPP loan forgiveness, the amount of forced-to-shut down venue technicians grant, or receipts used to evaluate ERTC claims. This safe harbor exists under Revenue Procedure 2021-3 in August 2021, and it must be applied consistently across all organizations by your school.

More on Qualifications


The refundable tax credit known as the Employee Retention Credit (ERC) can qualify for half of an employer’s employee earnings for various taxes. ERC refunds offer entities financial resources for continuing to pay employees during the hardships of the COVID-19 pandemic and government mandates that negatively impacted gross revenue during that time.

Entities like your learning institution might be eligible for ERC refunds if they had to limit operations or completely shut down due to government directives related to the COVID-19 pandemic. Your organization can also qualify for calendar quarters where gross revenue fell below 50% of earnings for the same quarter in 2019.

These credits were accessible for 2021 with the passage of the American Rescue Plan Act (ARP), with some adjustments. The ARP provided additional opportunities for organizations to receive these recovery funds.

The allocation of Employee Retention Credit to qualified institutions, even if they have filed and received cash for the Paycheck Protection Program (PPP), makes qualification questions the most often asked since the American Rescue Plan Act passed.

Employers who are eligible can receive up to $5,000 per employee for 2020. The potential credit increases to $14,000 per employee for 2021.

That can add up to a sizeable refund that you should take advantage of. Let’s say your school employed 50 people in 2020 and 2021. You could receive a $250,000 credit for the first year and a $700,000 credit for the year after.

These credits are not limited to small schools. Unlike the PPP stimulus, qualifying entities can maintain any number of employees and still be eligible for the Employee Retention Tax Credits.

If your learning institution suffered a significant loss in total receipts when comparing similar quarters in 2019 and 2020, it could qualify for ERC refunds.

Your school may also be eligible if it had to limit or halt operations for financial quarters as directed by authorized government agencies due to the COVID-19 pandemic.

Other criteria could be that the institution did not have access to ERC because of state, federal, or other agencies under the original CARES Act.

Employee Retention Credits qualifiers were amended in January 2021 to qualify for credits if they are a 501(c)(1) nonprofit with tax-exempt status under section 501(a) or government companies that operate as medical or hospital treatment entities.

Which To Determine Employee Eligibility


Things that qualify for Employee Retention Credit (ERC) include payment to workers and specified charges for healthcare plans given in calendar quarters where school activities became restricted or shut down altogether due to mandates.

It is crucial to understand what qualified employee salary is under the law to determine what is recoverable with these credits. The definition changes depending on the number of people you employ and the institution’s size.

For example, learning institutions averaging more than 100 employees in 2019 would include healthcare expenditures and payments provided to employees terminated during the calendar quarters in question because of the financial strain brought about by mandates or lost revenue.

Your school can qualify for the amount paid to them for working a similar amount of time in the month previous to the onset of economic hardship that forced the termination.

As it currently stands, your school will likely be eligible for the 2021 ERC update if it meets the following criteria:

  • The learning institution was open for business before February 16, 2020, and is considered a severely distressed employee, or there are fewer than 500 W2 employees at the school.
  • The school experienced a partial or total shutdown mandated by the government’s COVID-19 pandemic response.
  • Your institution can show a 20% or greater loss in the gross receipts test for the calendar quarter(s) you seek ERC refunds for.

You can also qualify as a severely distressed employer with more than 500 employees if you suffer losses of 90% or more.

Summary


The Employee Retention Tax Credit (ERC) program encouraged businesses like yours to maintain staff on the payroll through the COVID-19 pandemic. Your private or independent school could qualify if its gross income decreased in the fiscal years of 2020 or 2021 compared to 2019 earnings.

The federal government has adopted more legislature instructing the IRS to adjust and offer additional extensions to include previous non-eligible entities. Qualifying and filing for ERC can help provide expense relief related to the pandemic. Learn more about how to qualify for this tax relief program for your learning institution. We recommend to contact a professional so we have given 3 recommendations of the best ERC firms available. 

Each firm has great customer service, proven track record, verified client review, and specializes in ERC. ERC Specialists takes the #1 position but they are only slightly better than the other two options.

We are confident in recommending these providers perform an ERC analysis for you, but always remember to do your research on a company if you consider hiring them.

4.6/5

4.3 of 5 stars

The company specializes in ERC tax refunds and has long experience obtaining the maximum amounts for clients. The team at ERC Specialists has a deep understanding of the ERC program’s workings as well as the field of payroll taxation. Their application is fast and simple, and it removes the guessing factor from applying for ERC tax refunds. 

Pros

  • The application process is simple and fast
  • You get no-cost analysis to see whether you will qualify
  • There are substantial discounts for upfront fee payment

Cons

  • It can take a while to get help via telephone

Note: ERC specialists uses a back office partner firm called LINQQS. When you click the link to start an ERC evaluation, you will see a LINQQS qualification form.

4.3/5

4.3 of 5 stars

Omega Accounting Solutions is the best ERC company on the list. They offer bridge loans, which make up for their potentially year-long processing time for customer refunds. They’ve already helped more than 2,000 clients and have excellent reviews online

Pros

  • File and prepare all amended tax documents
  • Application is fully secure and simple
  • There are ERC bridge loans that provide instant cash flow

Cons

  • Their client fees are not available on the website
4.1/5

4.1 of 5 stars

Besides offering their customers a fast and simple way to claim ERC tax money, ERC Today’s team charges no fees to find out if you qualify for a refund in the first place. They work fast to get your paperwork to the IRS. The client portal is safe to use, and there is dedicated customer support available. Those are just some of the reasons this company receives uniformly high marks from its many clients.

Pros

  • Customer support includes dedicated reps for each customer
  • The application process is totally streamlined
  • You can get a no-cost analysis to find out whether you qualify

Cons

  • Pricing is not transparent

Frequently Asked Questions


1. What are the deadlines for schools to submit an ERC claim?

The deadline for filing 2020 fiscal quarter claims is April 15, 2024. You must file your ERC claims for the 2021 fiscal year by April 15, 2025. The IRS will not process claims after these dates.

2. How do you apply for ERC for an independent or private school?

Learning institutions that qualify for ERC can apply for the credits on the final Form 941 or amend previous forms to receive this tax relief.

3. Are schools that placed their own COVID-19 restrictions outside of any mandated regulations eligible for the Employee Retention Credit refunds?

The independent or private learning institution should determine if they qualify for ERC based on the gross receipts or partial shutdown tests.

When examining eligibility through the reduction of gross receipts test, compare the quarter(s) in question to the same quarter in 2019. A 20% or more loss in gross receipts can qualify the school under this testing method. That is a change compared to the 2020 qualifications when an institution had to show a 50% or more gross receipts reduction to qualify for ERC.

Regarding the partial shutdown test, the school should evaluate the effect that any local, state, or federal mandates affected their operations through 2021 to support qualification because of a suspension (part or complete) of operations during the calendar quarter(s) under review.

If your school qualifies under either of these tests, you will likely receive ERC relief if you file a claim. If the institution can not meet qualifications under either method, your chances of qualifying for Employee Retention Credits are unlikely, at best.

4. What can we include in gross receipts for an independent or private learning facility?

The IRS has specific definitions for a gross receipt relating to a nonprofit business based on the Internal Revenue Code 6033. It typically showcases the amounts the school reports on Form 990. For nonprofits, gross receipts are:

  • Reportable gross income from all operations, including unrelated trades between entities.
  • Net tuition, after school, auxiliary, camp, food, and other revenue streams.
  • Investment income such as dividends, rent, and royalties.
  • Gross proceeds received from sales of school assets, including properties.
  • Gross revenue accrued through contributions, contracts, gifts, grants, pledges, and similar means.

The IRS excludes gross receipts from the Paycheck Protection Program (PPP). You can explore what is included and excluded in more detail by reading the entire listing under Returns by Exempt Organizations (Internal Revenue Code 6033).

Revisions of the gross receipts criteria can change between now and the filing deadlines, so verify you are working from up-to-date definitions.

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