Many charter schools do not realize that there may be relief available in the form of a payroll tax credit that can supply much needed cash flow.
Over the past year, government efforts to slow the spread of COVID-19 affected the entire nation. Both large and small employers were shut down, sometimes for months at a time. Schools have been particularly impacted by these government mandates. Reduced or suspended operations have led to difficulty in meeting payroll and other obligations. Many charter schools do not realize that there may be relief available in the form of a payroll tax credit that can supply much needed cash flow.
In order to assist employers in keeping their workers employed, the federal government enacted a number of provisions, including the Paycheck Protection Program loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as payroll tax credits under the Families First Coronavirus Recovery Act (FFCRA). The CARES Act also established another payroll tax credit that was largely overlooked in 2020 – the Employee Retention Credit (ERC). The ERC is a credit against the employer Social Security Tax. It is a particularly powerful credit, because the law made it a “refundable credit”. This means that if the computed credit exceeds the employer Social Security Tax, the employer gets to use the credit to offset other obligations like withholding and may even get money refunded from the IRS. This offset can provide an immediate source of cash flow by reducing the amount of money the employer has to send to the government. As we will see, the ERC is designed to do just that.
Prior to the passage of the Consolidated Appropriations Act in December 2020, businesses that received PPP funding were not eligible for the ERC. That is why many employers overlooked the ERC during 2020, because they were focused on qualifying for and spending PPP funds. The Consolidated Appropriations Act expanded the ERC eligibility to businesses that received PPP funding and made it retroactive to March 13, 2020. This article will explain the eligibility requirements to claim this credit, the period for which this credit is available, how to compute the credit, the interplay of the credit with the PPP loans and how to claim the credit.
ERC Eligibility Requirements
There are two ways to determine eligibility for the ERC:
1) Businesses whose operations were either partially or fully suspended by a COVID -19 government order, or
2) Businesses that suffered a substantial decline in Gross Revenues.
Businesses Whose Operations Were Either Partially or Fully Suspended by a COVID-19 Government Order
This eligibility requirement should be of particular interest to charter schools. During 2020 campuses were initially fully closed under government orders. Schools were quick to react to move to an on-line model but that on-line model allowed schools to only partially reopen their operations. These closures specifically meet the test of operations being partially or fully suspended by government order. As we move forward through 2021 and these orders are being lifted, it is likely that the best opportunity for a charter school to claim this credit would be for 2020, although capacity limitations may provide an opportunity for 2021 as well. Schools who meet this eligibility requirement may be eligible for the ERC based on wages that were paid to staff during the suspended operations.
Businesses That Have Suffered a Substantial Decline in Gross Revenues
This eligibility requirement is a test of Gross Revenues as compared to Gross Revenues in prior years. There is a separate test for 2020 and 2021. For 2020, charter schools will be eligible for the ERC due to a substantial decline in Gross Revenues beginning in the first quarter in 2020 where Gross Revenues are at least 50% less than the same quarter in 2019. For a charter school, Gross Revenues generally include tuition, afterschool program fees, food-service fees, investment income (including interest, dividends, rents and royalties) and amounts received as contributions, gifts or grants. For 2021, charter schools will be eligible beginning in the quarter that Gross Revenues are less than 80% of the Gross Revenues (a 20% or more decline in Gross Revenues) as compared to the same quarter in 2019 OR the immediately preceding quarter as compared to the same quarter in 2019.
Periods for Which the ERC is Available
Due to the expansion of the ERC program though the Consolidated Appropriations Act and the further expansion of the program through the American Rescue Plan Act, the ERC is available for qualified wages and health insurance costs paid to the school’s eligible employees for the time period 3/13/20 through 12/31/21.
Computation of the ERC
If the school was considered a “large employer” the ERC is only available to schools for wages and health insurance costs paid to employees who were paid and did not perform services to the school – those who sat at home and still were paid. For 2020 a charter school was considered to be a large employer if the school had 100 or more employees. For 2021 a charter school is considered to be a large employer if the school had 500 or more employees.
2020 ERC – the maximum amount of the credit for the school for 2020 is computed at 50% of qualified wages and health insurance costs on up to $10,000 of costs per eligible employee for the year. This computes to a maximum credit of $5,000 per employee for calendar year 2020.
2021 ERC – the maximum amount of the credit for the school for 2021 is computed at 70% of qualified wages and health insurance costs on up to $10,000 of costs per eligible employee per quarter and not per year. This computes to a maximum credit of $7,000 per employee PER QUARTER for 2021.
If your charter school fully qualifies for all eligible quarters this can mean up to $33,000 per eligible employee between 2020 and 2021.
Interplay of the ERC and PPP Funding
Prior to the passage of the Consolidated Appropriations Act in December 2020, businesses that received funding with PPP loans were not eligible for the ERC. The provisions in the Consolidated Appropriations Act eliminated this restriction, thereby allowing businesses that received PPP funding to claim the credit. Here is the catch – any wages and health insurance costs that the charter school used as a part of their PPP forgiveness application are not eligible wages and health insurance costs for purposes of computing the ERC. Because of the timing of the government shutdown orders and the availability of PPP funding, it is likely that charter schools have eligible wages for 2020 that were not covered with PPP funding.
Claiming the ERC
The ERC is a payroll tax credit that is claimed on your quarterly payroll tax returns against the employer share of employee’s Social Security taxes. If the amount of the credit exceeds the employer’s share of these taxes, the credit will further reduce other payroll tax deposit requirements. If the other payroll tax deposit requirements are reduced to $0 and there is still available credit, the difference is refundable to the school.
In order to retroactively claim the credit for 2020 (and maybe the first quarter of 2021) it will be necessary to amend the school’s previously filed quarterly payroll tax return(s). If the school uses an outside payroll service provider you must coordinate with that provider to file the amended returns. Generally the outside payroll service provider will complete the amended returns on behalf of the school but will not make the computations that are necessary for the amended return due to the interplay with the PPP funding and the inclusion of health insurance costs. These computations will need to be made for the school with the help of a qualified professional.
In conclusion, it may be very beneficial for your charter school to consider the applicability of the ERC. The rules are complex and have been presented here as an overview to gain a basic understanding of the ERC and the schools’ potential eligibility. At KRD, we are very well versed in this credit and how to evaluate its applicability to charter schools.
If you would like to explore this opportunity further please contact us at 847-240-1040 or contact us online.