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CARES Act Benefits for Nonprofit CAAs

Payroll Tax Relief

Employee Retention Credit

Overview***

The Employee Retention Credit is a fully refundable payroll tax credit for qualifying employers equal to a percentage of qualified wages paid to employees (including allocable qualified health plan expenses) during a shutdown or suspension of the employer’s operations, or significant loss of revenue. For 2020, the credit equals 50 percent of qualified wages paid to an employee during a calendar quarter. For the first and second calendar quarters of 2021, the credit has been increased to 70 percent of qualified wages each quarter.

Eligibility***

Tax-exempt nonprofit community action agencies (CAAs) and state associations (including 501(c)(3)s and 501(c)(4)s) are eligible for the Employee Retention Credit for a given calendar quarter if it either: (1) fully or partially suspends its operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or (2) experiences a significant decline in gross receipts. For a nonprofit, “gross receipts” means the total amount of income the nonprofit receives from all sources during its annual accounting period, without subtracting any costs or expenses.

2020
For 2020, a significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends on the earlier of January 1, 2021, or with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter during 2019.

2021
For the first and second quarters of 2021, employers must determine separately for each quarter whether it experienced a significant decline in gross receipts. In order to be eligible for the employee retention credit, gross receipts for the calendar quarter must be less than 80 percent of its gross receipts for the same quarter in 2019.

Alternatively, employers may elect to determine whether they experienced a significant decline in gross receipts using gross receipts from the immediately preceding quarter in 2021. For example, to determine eligibility for the credit for the first quarter 2021, an employer cwould look at gross receipts from the fourth quarter in 2020 and determine if they were less than 80 percent of gross receipts from the fourth quarter in 2019. If so, they would be eligible for the employee retention credit.

.Prior to the Consolidated Appropriations Act, 2021 (the Act), PPP recipients were not eligible for the employee retention credit. However, the law now permits an employer that receives a PPP loan to claim an employee retention credit, effective retroactively to March 27, 2020 (the effective date of the CARES Act). Any qualified wages that are forgiven under PPP loan forgiveness will not count towards the employee retention credit. Likewise, any qualified wages claimed by an employer for the employee retention credit will not qualify for loan forgiveness under the PPP.

Amount of Credit***

2020
The credit for 2020 equals 50 percent of the qualified wages (including qualified health plan expenses) that an eligible employer paid in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000. This means that the maximum credit available for 2020 for any employee is 50 percent of $10,000, or $5,000.

For example, if an employer pays an employee $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020, the employer is eligible for a credit equal to $4,000 in Q2 and $1,000 in Q3. Due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters, an employer can only count $2,000 of the $8,000 in qualified wages in Q3 when calculating the credit.

Q1 and Q2 2021
The credit for the first and second calendar quarters of 2021 equals 70 percent of the qualified wages (including qualified health plan expenses) that an eligible employer pays in each calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for each of these two calendar quarters is $10,000. So the maximum credit for qualified wages paid to any employee in the first quarter of 2021 is 70 percent of $10,000, or $7,000, and for the second calendar quarter of 2021 is 70 percent of $10,000, or $7,000, for a total of $14,000 over both quarters.

For example, if an employer pays an employee $15,000 in qualified wages in Q1 2021 and $15,000 in qualified wages in Q2 2021, the employer is eligible for a credit equal to $7,000 in Q1 (70% of the $10,000, the maximum amount of qualified wages) and $7,000 in Q2.

Qualified Wages***

Qualified wages are wages and compensation paid to employees after March 12, 2020, and before July 1, 2021. This includes qualified health plan expenses that are properly allocable to the wages.

For 2020:

If the employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, an employee’s qualified wages for purposes of calculating the credit may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.

For 2021, the threshold number of averaged full-time employees in 2019 for purposes of determining which of the above qualified wages analyses applies was raised from 100 to 500.

The amount of qualified wages for which an employer may claim the Employee Retention Credit may not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act.

Claiming the Credit***

The Employee Retention Credit is allowed against the employer’s portion of social security taxes. Eligible employers will report total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, typically Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income and employment taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.

For 2021, only small eligible employers (averaged 500 or fewer full-time employees in 2019) may request an advance of the Employee Retention Credit. They may file Form 7200, Advance Payment of Employer Credits Due to COVID-19 if the employer does not have sufficient federal employment taxes set aside for deposit to cover the payment of qualified wages to employees.

Prior to the Consolidated Appropriations Act, 2021 (the Act), PPP recipients were not eligible for the employee retention credit. However, the Act now permits an employer that received a PPP loan to claim the employee retention credit, effective retroactively as of March 27, 2020 (the effective date of the CARES Act). Any qualified wages that are forgiven under PPP loan forgiveness will not count towards the employee retention credit. Likewise, any qualified wages claimed by an employer for the employee retention credit will not qualify for loan forgiveness under the PPP.

Additional Resources***

Deferral of Payroll Taxes

Overview

The CARES Act allows employers to delay paying their share of social security taxes on all employee wages from the date of the CARES Act’s enactment (March 27, 2020) through December 31, 2020.

Eligibility*

All employers are eligible for this payroll tax deferral. Though previously, recipients of forgiven PPP loans were not eligible for this payroll tax deferral, the PPP Flexibility Act (June 5, 2020) amended the CARES Act to allow recipients of PPP loans to defer these payroll taxes, even if the PPP loan is forgiven.

Deferral Period

Employers may defer paying their share of social security tax (6.2%) on all employee wages paid between March 27, 2020 and December 31, 2020. These taxes are due in two installments—50% must be paid to the IRS by December 31, 2021, and the remaining 50% is due by December 31, 2022.

*Updated October 15, 2020
***Updated April 23, 2021

This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Grant Award Number 90ET0467-03. Any opinion, findings, conclusions, or recommendations expressed in these materials are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.