A Guide to Employee Retention Credit for Private Schools

May 1, 2024
Gideon Ward
Fact Checked

The CARES Act and subsequent COVID-19 legislation have opened up possibilities for independent schools to potentially qualify for 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.

In the case of 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 have a positive impact on 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 the benefits it offers.

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

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 non profits, are able to apply for the Employee Retention Credit. Notably, because of this Act, General Appropriations, there has been an expansion. in the criteria to include organization 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:

The business operations were either fully or temporarily suspended because of a government order. It’s important to note that the suspension is limited to the quarter of closure, rather than the whole quarter.

Employer experienced a significant decrease in gross receipts.

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

To submit a claim for the tax credit for previous quarters, employers need to submit the 941-X Form and a few other forms for the relevant time 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 an amount of $10,000, paid by employers whose businesses were either fully or partially suspended due to COVID or experienced a reduction of 50% 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: The business operations were fully or partially suspended due to a COVID government order during the quarter, or 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? Well, 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 to qualify for the credit have undergone changes for the year 2021.

To meet qualifications, a significant portion of that employer’s business needs to have been disrupted. For the 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?

The eligibility of charter schools for Employee Retention Credit (ERC) is not automatically granted solely based on the impact of the pandemic on the school. Various factors, such as the 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 full $26,000 per employee, it is still important 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 organization, now have eligibility for the tax credit. The Annual Finance Act expanded this eligibility further to encompass businesses who 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:

The school’s operations were either temporarily or entirely suspended and/or had a reduction in operating hours due to the COVID federal mandate.

It’s important to note that the credit only applies to the specific period during which the school was closed and 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 managed 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 have eligibility 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 the school operations were halted, qualify for Employee Retention Credit.

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

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

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

Operational Status: Your school must have been in operation 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 in gross receipts a revenue decline of 20 percent or more 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 prior to the economic insecurity. Ensuring that 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 a decrease in gross income during 2020 or 2021 compared to the previous year, there is a possibility that you may meet the qualifications for ERTC. The ERC was specifically 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 wider 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 potentially receive financial relief and assistance in addressing the expenses associated with the impact of COVID-19.

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