The Employee Retention Credit: Another Payroll Credit for Churches?

By Rickey Letson

The Payroll Protection Program (PPP) opened up a whole new world for many churches. For the first time in their existence, churches applied for and received forgivable government loans in the early days of COVID-19.

Of course, there was a lot of debate about the ethics of congregations taking advantage of such a loan. Some churches felt comfortable participating in the program and others did not. As Baptists, we affirm each congregation’s right to think through the elements of PPP and make the wisest decision for themselves.

While PPP captured the attention of lots of churches, another similar program called the Employee Retention Credit or ERC was introduced in early 2020. The ERC, however, is not nearly as widely known among congregations. The ERC is a refundable credit that nonprofits, just like for-profit businesses, can claim on qualifying wages, including certain health insurance costs that are paid to employees. Like PPP, churches qualify to apply for the ERC and can do so even if they were awarded funds by the Payroll Protection Program.

The ERC is the result of multiple pieces of legislation, and requires unique, individual analysis to determine its availability to each organization. Both for the sake of brevity and clarity to you our reader, here are 5 things to know about the program.

First, the possible credit can be substantial and, in some cases, more than what a church might have received from the Payroll Protection Program.

For instance, qualified employers can file for up to 70 percent of qualifying wages up to a limit of $10,000 per employee for the first three quarters in 2021. Wages that qualify are generally those subject to FICA taxes. Some health expenses qualify as well. It’s easy to see how substantial sums can quickly add up in even a small church with only a few qualifying employees. (It is important to note that wages and healthcare expenses used to obtain a forgivable PPP loan cannot also be used in calculating an ERC.)

Second, the credit applies to full-time employees or those who work at least 30 hours a week.

Third, ordained clergy may not be counted when calculating the ERC.

This is due to housing allowances and the unique FICA elements of clergy compensation. Having said that, in a church scenario, even if clergy are excluded, other non-clergy staff are most likely eligible.

Fourth, the credit is available to a church that meets one of two different criteria.

The first criteria is that there was a government-forced suspension of services or activities. This suspension could be the result of national, state or local government decisions. The other possible criteria is that revenue has declined significantly over the year against which the credit is being filed. For instance, a claim filed against 2021 requires a reduction of gross income of 20 percent or more, as compared to the same quarter in 2019.

Fifth, while most churches were able to fill out their own applications for PPP, the ERC is a much more complicated process.

Application for ERC requires filing Form 941-X. Most churches wanting to pursue the Employee Retention Credit may desire to engage a trusted group to file on their behalf.

For some congregations, the ERC may warrant further research. Should a church want to learn more, a quick Google search will provide a wealth of information and videos that can quickly help your church leadership to further understand the program and its nuances. Of course, a trusted local CPA, a church’s payroll service or even a firm that specializes in tax credits could also be a tremendous asset in understanding how ERC works. In the end, some churches may decide that filing for the ERC is worth pursuing. Other congregations may decide for a variety of reasons that this is not for them. Again, at Generous Fellowship, our desire is simply to make you as church leaders aware of the existence of this particular tax credit which, like the PPP, is a direct result of these strange circumstances brought about by COVID-19.