A Guide to Employee Retention Credit for Private Schools

The CARES Act and subsequent COVID-19 legislation have opened up possibilities for independent schools to qualify for the Employee Retention Credit (ERC). This refundable payroll tax credit is specifically designed for employers, including independent schools, that had their operations either entirely or partially suspended due to government orders related to COVID-19 or experienced certain revenue losses compared to the year 2019.

For eligible independent schools that have yet to claim the ERC, there is an opportunity to rectify this situation by filing amended payroll tax returns. It is crucial to adhere to the deadline for filing these returns, which is April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC.

Key Insights on the ERC Credit for Your Understanding:

Determine Eligibility for ERC: Gain clarity on whether your private school meets the qualifications for this tax credit, which can positively impact your financial outcomes.

Meeting the Requirements for Credit Qualification: Acquire knowledge about the criteria and necessary steps to ensure that your school satisfies the prerequisites for claiming the credit.

Employee Eligibility Criteria: Identify which employees are eligible for the Employee Retention Credit and explore ways to maximize its benefits.

Complying with Requirements: Familiarize yourself with the specific obligations and conditions your school must meet to claim the credit successfully.

Unleash the Potential of Your Business: Harness the power of the Employee Retention Credit to unlock the opportunity to claim up to $26,000 for each employee, significantly boosting your refund and overall financial standing.

A Guide to Eligibility

With the implementation of the ARPA (American Rescue Plan), a wide range of businesses, including colleges, hospitals, schools, and nonprofits, are able to apply for the Employee Retention Credit. Notably, because of this Act, General Appropriations, the criteria have been expanded to include organizations and businesses that previously received PPP and borrowers who were initially ineligible for the credit.

To qualify for the ERC, employers must meet one out of the two conditions during the particular month on the calendar the credit is applied:

A government order suspended business operations either entirely or temporarily. It’s important to note that the suspension is limited to the quarter of closure rather than the whole quarter.

Employers experienced a significant decrease in gross receipts.

On March 1, 2021, the IRS released the 2021-20 Notice, providing detailed guidance on how businesses can claim the Employee Retention Credit. This notice included retroactive claims for those who received the loan from PPP.

To submit a claim for the tax credit for previous quarters, employers must submit the 941-X Form and a few other forms for the relevant periods in which employers paid a qualified wage to an employee. The Internal Revenue Service offers three illustrative examples in Question and Answer No. 57 to facilitate understanding of the process.

The ERTC is designed to support businesses in retaining their employees and covers 50% of wages, up to $10,000, paid by employers whose businesses were either fully or partially suspended due to COVID-19 or experienced a 50% reduction in gross sales or more.

Importantly, this credit is available to all sizes of employers, including tax-exempt organizations.

Businesses must meet one of the two independent tests to qualify for the credit:

Calendar quarter test: Business operations were fully or partially suspended during the quarter due to a COVID government order, or the employer’s gross receipts for the quarter were fewer than 50 percent compared to the same 2019 quarter.

Gross revenue test: If your gross revenue exceeds 80% of the corresponding 2019 month, they are no longer eligible for the credit.

Which School Types Can Claim ERC?

Do private schools qualify for ERC? Do independent schools qualify for ERC? Determining which types of schools qualify for Employee Retention Credit is crucial for understanding the potential benefits they can avail. Here are the key criteria:

In the 2020 calendar year, private schools and tax-exempt organizations engaged in business may qualify if they either entirely or partially suspended their operations for the entire calendar quarter due to COVID-19. Alternatively, they are eligible if they experienced a considerable decline in revenue during that same quarter.

It’s important to note that the standards for qualifying for the credit have changed for 2021.

To meet qualifications, a significant portion of that employer’s business needs to have been disrupted. For ERC purposes, a substantial portion is defined as a component of the employer’s business that either generates revenue of at least 10% of gross receipts and/or involves employees working for no less than 10 percent of total work hours performed by every employee in the company’s business.

Do Charter Schools Qualify for ERC?

Eligibility for Employee Retention Credit (ERC) for charter schools is not automatically granted solely based on the impact of the pandemic on the school. Various factors, such as industry, state, and individual circumstances, play a role in determining eligibility for the credit and the amount that can be claimed.

While not all charter schools may qualify for the entire $26,000 per employee, it is still essential to consider this incentive if they have experienced any of the following impacts:

Transitioning to virtual learning because of the pandemic.

Adhering to social distancing mandates imposed by authorities.

Facing restrictions on the use of facilities due to COVID-19 guidelines.

Dealing with enrollment limitations due to the pandemic’s effects.

Meeting the Qualifications: What Your School Must Fulfill

With the enactment of the American Rescue Plan Act, most institutions, including universities, colleges, clinics, and nonprofit organizations, are now eligible for the tax credit. The Annual Finance Act expanded this eligibility further to encompass businesses that received loans through the PPP and debtors previously deemed ineligible.

To be considered eligible, your school must meet one of the two conditions within the quarter in which the credit is applicable:

Due to the COVID-19 federal mandate, the school’s operations were either temporarily or entirely suspended, and/or operating hours were reduced.
It’s important to note that the credit only applies to the period during which the school was closed, not the whole month.

Guidance from the IRS says certain schools may not fulfill the first test and, therefore, would not meet the qualifying standards. These are schools experiencing forced closures but managing to maintain their operations predominantly through telework arrangements.

However, schools that experience a significant drop in gross earnings still may qualify based on the second-factor test.

School Employee Eligibility for Employee Retention Credit

Determining which employees are eligible for ERC is essential to understanding the benefits they can receive. Here are the key points:

Qualified wages, which encompass specific healthcare plan expenses, paid during any eligible quarter during which school operations were halted, qualify for Employee Retention Credit.

To comprehend this, it’s essential to grasp the definition of “qualified wages” as determined by the law. The definition varies and is based on the school’s size and the number of employees. Employers can utilize ERC to recover qualified wages.

For schools with an average of over 100 employees in the 2019 year, eligible wages include specific health plan expenses and any payments made to terminated employees due to the school’s financial difficulties.

To determine your eligibility for Employee Retention Credit (ERC) in the 2021 update, specific requirements and considerations must be taken into account. Here are the key factors to consider:

Operational Status: Your school must have operated before 2020, starting February 16.

Employee Count: You must have either fewer than 501 employees on W2 during the qualified quarter

Impact of Government Shutdown or Revenue Loss: You must meet at least one of the following conditions:

a. Your school was subject to a complete or partial shutdown from the government.

b. You can demonstrate a revenue decline of 20 percent or more in gross receipts during the qualified quarter.

Severely Distressed Employer Provision: Even if your school has over 500 employees, you may still qualify for this provision if you experienced a significant decline of 90 percent or more.

The ERC allows eligible employers to recover an amount equivalent to what their employees were paid for working a comparable amount of time in the 30 days before the economic insecurity. Ensuring you meet these requirements will enhance your chances of qualifying for the ERC in the 2021 update.

Final Thoughts

If your school experienced disruptions or decreased gross income during 2020 or 2021 compared to the previous year, you may meet the qualifications for ERTC. The ERC was explicitly implemented to incentivize businesses, including schools, to retain their employees throughout the challenges posed by the pandemic.

Recent adjustments and extensions to the ERC have made this credit more accessible to a broader range of enterprises. It is essential to gather more information about the ERC and understand the process to determine whether your school qualifies for this IRS incentive. By obtaining the ERC, your school can receive financial relief and assistance in addressing the expenses associated with the impact of COVID-19.