Employee Retention Credit for Higher Education Institutions
The Employee Retention Credit (ERC) is starting to come to the forefront for organizations that didn’t apply for Paycheck Protection Program (PPP) loans. This can potentially be low-hanging fruit for some higher education institutions.
The ERC is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. This credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000. Therefore, the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. An eligible employer is an employer that isn’t a governmental entity and didn’t receive a PPP loan and was fully or partially shut down due to a governmental order or experienced a significant decline in gross receipts due to COVID-19.
According to IRS FAQ 28, orders, proclamations, or decrees from the federal government or any state or local government are considered “orders from an appropriate governmental authority” if they limit commerce, travel, or group meetings due to COVID-19 in a manner that affects more than a nominal portion of an employer’s operations. This includes orders that limit hours of operation from a state or local government that has jurisdiction over the employer’s operations. It’s important not to limit the identifying of a governmental order to just a higher education institution’s main operation. There might be some states that didn’t order in-person classes to stop, but did order dining services, gyms, or day cares to close. If a higher education institution had its dining services shut down due to a governmental order, that partial shutdown qualifies the institution for the credit. The same is true if the institution runs a day care or gym for employees and/or students and that was shut down by a governmental order. The credit isn’t limited to only employees in that department; the credit is for any employee in the institution that was paid qualified wages during the shutdown period. The key is to find the governmental order that applies to your organization and has the longest period of shutdown to enhance the amount of qualified wages you can include in your calculations. Some organizations may only want to look at their applicable state order, but others may want to dive further into the county and city orders that apply to them.
For employers with 100 employees or less, you can use the wages paid to any employee during that quarter as qualified wages. For employers with more than 100 employees, the only qualified wages you can use for this credit are the wages paid to an employee who, because of the full or partial shutdown or the significant decline in gross receipts (as applicable), wasn’t providing services or was providing fewer services than what they were compensated for. This does include furloughed employees if you were still paying for their health benefits. For higher education institutions, this could include dining services personnel, janitorial staff, athletic staff, security, and professors who worked fewer hours due to virtual classes instead of in-person classes. For example, if a professor normally works 40 hours per week and is paid salary but during the partial shutdown was only working 30 hours per week to do virtual teaching, 10 hours per week of their salary would go toward this credit, as long as their salary wasn’t reduced during that time period. It’s important to document your file for the time they weren’t working. Some institutions will be able to look at the payroll codes they previously set up for COVID-19 time. For others, it may involve discussing with each department who was or wasn’t working during the time frame the full or partial shutdown was in place.
An organization also is eligible for the credit if there was a significant decline in gross receipts during the quarter. This involves looking at your gross receipts for the quarter and comparing them to the same quarter for the prior year. If the revenues are down more than 50 percent, you’re eligible for the credit for that quarter. It’s important to note that aggregation rules do apply for this. If you’re part of a system, there’s a chance the system could be seen as one single employer for the purposes of this credit. Therefore, the significant decline in gross receipts would have to be all of the aggregated entities together.
Eligible employers will report their total qualified wages for purposes of the ERC for each calendar quarter on their Form 941, Employer’s Quarterly Federal Tax Return, which has been updated to include lines for claiming the payroll tax credits under the Coronavirus Aid, Relief, and Economic Security Act and the Families First Coronavirus Response Act. Eligible employers that paid any qualified wages between March 13, 2020, and March 31, 2020, inclusive, should include 50 percent of those wages together with 50 percent of any qualified wages paid during the second quarter of 2020 on their second-quarter Form 941, 941-SS, or 941-PR to claim the ERC. Employers shouldn’t include the credit on their first-quarter Form 941, 941-SS, or 941-PR.
In anticipation of receiving the ERC, eligible employers can fund qualified wages by 1) accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS, and 2) requesting an advance of the credit from the IRS for the amount of the credit that isn’t funded by accessing the federal employment tax deposits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
For frequently asked questions on the ERC, see this previous BKD Thoughtware® article.