Employee Retention Credit: Worth a Second Look for Your Church

  • Tax strategies
  • 8/31/2022
Nonprofit professionals having discussion during meeting in open space.

Key insights

  • The employee retention credit (ERC) remains available for eligible churches to claim on amended payroll tax returns for qualifying periods
  • Unlike PPP, which has certain use restrictions, eligible churches that have obtained the ERC are able to spend the funding as they see fit.
  • 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.

Ready to consider ERC?

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Economic fluctuations, labor market challenges, COVID-19 mandated government restrictions affecting employees and parishioners, uncertainty whether parishioners will return to in-person service (and the resulting effect on contribution revenue) — events of the past two-plus years have left many church leaders wondering what to do next and how they can recover.

Fortunately, there is a COVID-19 relief program still available that you may have overlooked. If your church experienced a significant decline in quarterly gross receipts or was subjected to a full or partial suspension of operations by a government order, you may be entitled to credit of $5,000 per employee for 2020 and $7,000 per employee per eligible 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 qualifying periods assuming they met the eligibility criteria and paid eligible wages and/or benefits during those times.

Benefits of ERC

For eligible organizations, there are no strings attached to how the funding is used as it relates to eligibility for the tax credit. Unlike the Paycheck Protection Program (PPP), where an organization needed to spend the funding on specific payroll and non-payroll costs to achieve forgiveness of its PPP loan, eligible churches that have obtained the ERC are able to spend the funding as they see fit.

  • Does your church have deferred maintenance that cannot be covered in your annual budget?
  • Are there certain programs that could be enhanced or expanded to serve more of your congregation with increased funding?
  • Have you frozen employee pay or struggled to offer pay increases to your employees to keep up with rising costs and inflation?

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

Common misconceptions

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

As a church, we do not file a tax return, and as a result, are not eligible for the ERC.

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

We obtained a PPP loan, which precludes 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 (signed into law on December 27, 2020) repealed this provision retroactive to March 12, 2020. This means you are now allowed to claim the ERC while also receiving full forgiveness on your PPP loan(s). In fact, many churches have done just that.

You do need to proceed with caution as you are not allowed to “double dip” between these programs. Any wages or benefits used to obtain forgiveness on your PPP loan(s) are not eligible for the ERC.

We are hesitant to pursue the credit as we do not want the requirement to file tax returns moving forward and do not want government mandates over our operations.

By claiming the ERC, you are not subjected to government mandates any more than you were previously. There are no additional restrictions, modifications, or oversight from the government on your operations as a result of claiming the credit.

You are required to continue to file your quarterly Form 941 as you always have, but there is no requirement to file annual tax returns moving forward. The IRS simply needs a mechanism to collect the information from you to issue your tax credit, which is a one-time amended payroll tax filing (Form 941X). Upon filing the Form 941X, the IRS has five years to audit and potentially disallow the refund either due to not being eligible for the tax credit or miscalculating the credit itself.

Our church did not experience a significant decline in gross receipts. Our parishioners were faithful supporters of us during these uncertain times.

There are two ways to qualify for the credit. If you did not experience a significant decline in gross receipts during 2020 or 2021, you could still qualify for the ERC under the partial suspension of operations provisions. In our experience, most churches that have pursued the credit have done so because they qualified due to government-mandated restrictions that affected their operations either fully or partially. Also, the decline in gross receipts is measured quarterly against the same quarter of 2019, so your organization may have had flat revenues for the year, but had timing differences from 2019 to 2020 or 2021, triggering eligibility.

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

Remember, each employee can generate a maximum credit of $5,000 for 2020 and $7,000 per eligible quarter in 2021 depending on the amount of wages and benefits paid during the applicable time period. In many instances, we have observed churches qualifying for over $12,000 per employee. Even with only 5 – 10 employees, the financial benefit to your church adds up quickly.

Next steps

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

Form 941 Quarter Initial Form 941 Due Date Form 941X Due Date to Claim the 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 eligibility for the ERC, knows the wages and benefits that may be used in calculating the credit, and has the experience to accurately prepare the associated tax return. We understand it takes balance. Let’s work together to turn the challenges you face into opportunities. Our nonprofit team can help your religious organization.

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