Employee Retention Recognition: Your Church Worth a Second Look : 2022 : Articles : Resources : CLA (CliftonLarsonAllen)

Important Findings

  • The employee retention credit (ERC) remains available for eligible churches to claim on amended payroll tax returns for qualifying periods
  • Unlike PPP, which is subject to certain usage restrictions, eligible churches that have received the ERC are free to spend the funding at their discretion.
  • Tax credits are new to many churches, which has led to questions and misunderstandings about the ERC.
  • A second look could add up to a financial benefit for your church.

Economic volatility, challenges in the job market, government restrictions imposed by COVID-19 on staff and parishioners, uncertainty as to whether parishioners will return to personal ministry (and the resulting impact on dues revenues)—the events of the past two years have left many churches Executives are wondering what to do next and how to recover.

Fortunately, there is one more COVID-19 relief program that you may have overlooked. If your church has experienced a significant decline in quarterly gross receipts or has ceased operations in whole or in part by a government order, you may be eligible for a credit of $5,000 per employee for 2020 and $7,000 per employee per qualifying quarter for the first three quarters of 2021 .

This credit, the Employee Retention Credit (ERC), remains available for churches to claim on amended payroll tax returns for waiting periods, provided they met eligibility requirements and paid eligible wages and/or benefits during those periods.

Benefits of ERC

Eligible organizations have no eligibility requirements as they relate to eligibility for the tax credit. Unlike the Paycheck Protection Program (PPP), which required an organization to provide funding for certain payroll and other expenses in order to qualify for forgiveness of their PPP loan, eligible churches that have received the ERC can choose to fund themselves spend discretion .

  • Does your church have deferred maintenance that cannot be covered in your annual budget?
  • Are there specific programs that could be improved or expanded to serve more of your community with more resources?
  • Have you frozen employee salaries or struggled to offer your employees raises to keep up with rising costs and inflation?

If so, take another look at the ERC and the potential $26,000 per employee that might be available to you right now.

Common misunderstandings

Tax credits are new to many churches, which has led to questions and misunderstandings about the ERC. Let’s address some of these misconceptions:

As a church, we do not file tax returns and are therefore not eligible for the ERC.

While churches do not typically file a 990 like most other nonprofit organizations, churches file a quarterly Form 941, which is the base tax form for applying for the credit.

We received a PPP loan, which prevents us from claiming the ERC.

While the CARES Act prevented an organization from obtaining a PPP loan and claiming the ERC, the Consolidated Appropriations Act 2021 (enacted December 27, 2020) retroactively repealed that provision as of March 12, 2020. This means you can now apply for the ERC and receive full forgiveness on your PPP loan(s). In fact, many churches have done just that.

You must proceed with caution as you are not allowed to switch between these programs. Any wages or benefits used to obtain forgiveness of your PPP loans are not eligible for the ERC.

We are reluctant to pursue the loan as we do not want future tax filing and we do not want government mandates over our operations.

By using the ERC, you are no longer subject to government mandates. There are no additional restrictions, modifications or government oversight of your business operations as a result of taking out the loan.

You must continue to file your quarterly Form 941 as usual, but there is no obligation to file annual returns going forward. All the IRS needs is a mechanism to collect the information from you to issue your tax credit, which is a one-time amended employment tax return (Form 941X). After filing Form 941X, the IRS has five years to review and possibly deny the refund because it either doesn’t qualify for the tax credit or miscalculated the credit itself.

Our church did not experience a significant decrease in gross receipts. Our parishioners have been loyal supporters during these uncertain times.

There are two ways to qualify for the loan. If you did not experience a significant drop in gross revenue in 2020 or 2021, you could still qualify for the ERC under the partial suspension of operations provisions. In our experience, most churches that applied for the loan did so because they qualified due to government-mandated restrictions that impacted some or all of their operations. Also, gross revenue decline is measured quarterly compared to the same quarter in 2019, so your organization may have had consistent revenue for the year but had timing differences between 2019 and 2020 or 2021, which triggers eligibility.

We are a small community with only 5-10 employees. The ERC would not benefit us financially.

Keep in mind that each employee can generate a maximum credit of $5,000 for 2020 and $7,000 per qualifying quarter in 2021, based on the level of wages and benefits paid during the period. In many cases, we have observed churches claiming over $12,000 per employee. Even with just 5-10 employees, the financial benefits for your community quickly add up.

Next Steps

The ERC remains available to churches to make claims by amending their payroll tax returns for three years after the original filing deadline. There is still time to change your returns to capture the credit.

Form 941 Quarter Original Form 947 Due Date Form 941X Due Date to Apply for ERC
Q2 2020 July 31, 2020 July 31, 2023
Q3 2020 October 31, 2020 October 31, 2023
Q4 2020 January 31, 2021 January 31, 2024
Q1 2021 April 30, 2021 April 30, 2024
Q2 2021 July 31, 2021 July 31, 2024
Q3 2021 October 31, 2021 October 31, 2024

How we can help

CLA understands the factors affecting ERC eligibility, knows the wages and benefits that can be used in calculating the credit, and has the experience to accurately prepare the associated tax return. We understand that balance is needed. Let’s work together to turn your challenges into opportunities. Our nonprofit team can help your religious organization.

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