Written by Kaydee Ruppert, Accounting & Financial Outsourcing Manager at Dean Dorton
The Employee Retention Tax Credit (ERTC), often referenced to as just ERC, is confusing a lot of nonprofit employers. If it’s confusing to you, you’re not alone! There are many nuances to this credit, but the following outline will assist you in navigating and maximizing the opportunity presented by ERTC.
The version of ERTC applicable to 2020 is slightly different than the version adopted for 2021, so they are addressed separately below for greater clarity. Also note that receipt of a Paycheck Protection Program (PPP) loan in either round does NOT prohibit your organization from taking advantage of the ERTC if you otherwise qualify, although any wages used for the ERTC cannot be used for PPP loan forgiveness.
2020 ERTC
Organizations that qualify for ERTC in 2020 may still apply for a refund or tax abatement applicable to the credit.
Determine Qualified Time Period
There are two methods for determining your organization’s qualified time period for 2020 ERTC. If both apply, you should select the one that covers the greater number of days. If neither apply, your organization is not eligible for ERTC for 2020.
If applicable, your organization’s qualified time period matches the dates during which operations in 2020 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The starting date for suspended operations cannot be before March 13, 2020. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.
If applicable, gross receipts for your organization must have significantly declined for one or more quarters in 2020 as compared to 2019. To determine eligibility under this method, first determine total gross receipts by quarter for 2019 and 2020. Divide the 2020 quarter totals by the respective 2019 quarter totals. If the result is less than .5, note the first day of that quarter per the chart below. That is the start of your significant decline in gross receipts. Compare subsequent quarters until you reach a result that is greater than .8. Note the last day of that quarter per the chart below. That is the end date of your significant decline in gross receipts.
| Start and End Date for ERTC | Sample Periods: 2020 ÷ 2019 | |||
| Q1 | 3/13/2020 – 3/31/2020 |
<.5 |
>.5 |
>.5 |
| Q2 | 4/1/2020 – 6/30/2020 |
<.8 |
<.5 |
>.5 |
| Q3 | 7/1/2020 – 9/30/2020 |
>.8 |
>.8 |
<.5 |
| Q4 | 10/1/2020 – 12/31/2020 |
>.8 |
>.8 |
>.8 |
| Sample Period of Significant Decline in Gross Receipts |
3/13/2020 – 9/30/2020 |
4/1/2020 – 9/30/2020 | 7/1/2020 – 12/31/2020 | |
Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 100 or fewer full-time employees in 2019. If your organization averaged more than 100 full-time employees in 2019, be aware that your calculation of qualified wages is different.
| Qualified Time Period in 2020 | Complete individually for each employee. | |||
| Q1 | Q2 | Q3 | Q4 | |
| Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2020. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base. | ||||
| Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions. | ||||
| Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act. | ||||
| The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter. | ||||
Calculate Credit and Request Refund or Abatement
Multiply each employee’s qualified wages, by quarter, by 50%. The result is the ERTC applicable to the employee for that quarter until the total year-to-date cumulative amount for the employee reaches $5,000. At that point, no additional credit can be claimed for the individual.
The maximum credit of $5,000 per employee may be realized in just one quarter for some employees, while other employees may not have sufficient qualified wages in the entire qualified time period to reach $5,000. Determine which quarters in 2020 are impacted by the credit for your organization. Then complete IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for those quarters to claim your refund or abatement.
2021 ERTC
The ERTC is available for qualifying organizations until December 31, 2021 and should be claimed on the quarterly 941 Forms for 2021. These forms are due in April, July, October, and January 2022 so there is still time to determine whether or not you are eligible to include the credit on your return. Once you are confident that your organization is eligible, you may also choose to reduce your employment tax deposits for anticipated credits or submit IRS Form 7200 to request advance payment of employer credits. For the 2021 ERTC, only employers that averaged 500 or fewer full-time employees during 2019 are eligible to request an advance payment of the credit.
Determine Qualified Time Period
There are three methods for determining your organization’s qualified time period that result in two possible time periods for the calculation of the 2021 ERTC. If more than one method applies, you should select the one that covers the greater number of days. If none apply, your organization is not eligible for ERTC for 2021.
If applicable, your organization’s qualified time period matches the dates during which operations in 2021 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.
If applicable, your organization’s gross receipts for one or all of the quarters in 2021 must significantly decline as compared to the same quarters in 2019. To determine eligibility under this method of qualification, first determine total gross receipts for the quarters being considered for 2019 and 2021. Divide the 2021 quarter total by the respective 2019 quarter total. If the result is less than .8 for the quarter, that full quarter is a qualified time period due to a significant decline in gross receipts.
If applicable, your organization’s gross receipts for the quarters immediately preceding the quarters being considered in of 2021 must reflect a significant decline as compared to the same quarters in 2019. A qualified time period of 1/1/2021 – 3/31/2021 requires that gross receipts for the fourth quarter of 2020 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 12/31/2020 by the same quarter in 2019. If the result is less than .8, the first quarter of 2021 is a qualified time period due to a significant decline in gross receipts.
Likewise, a qualified time period of 4/1/2021 – 6/30/2021 requires that gross receipts for the first quarter of 2021 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 3/31/2021 by the same quarter in 2019. If the result is less than .8, the second quarter of 2021 is a qualified time period due to a significant decline in gross receipts. The same methodology then applies to quarters 3 and 4 of 2021.
If this method is used to determine eligibility for a time period, you must elect to do so. Although the method for election has not been clarified yet by the IRS, there is an assumption that Form 941 will be updated to reflect this requirement.
Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 500 or fewer full-time employees in 2019. If your organization averaged more than 500 full-time employees in 2019, be aware that your calculation of qualified wages will be different.
| Qualified Time Period in 2021 | Complete individually for each employee. | |||
| Q1 | Q2 | Q3 | Q4 | |
| Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2021. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base. | ||||
| Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions. | ||||
| Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act. | ||||
| The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter. | ||||
Calculate and Report Credit
Multiply each employee’s qualified wages, by quarter, by 70%. The result is the ERTC applicable to the employee for that quarter. The credit is capped at $7,000 per quarter per employee and must be reported on Form 941 for the applicable quarter to receive the respective offset to employment taxes due.
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