Your Church May Qualify for Tax Credit — Even if You Think You Don’t
By Kirk Petersen
The good news is, many churches (and other small businesses) are eligible for tens of thousands of dollars in pandemic-related credits from the federal government, through the Employee Retention Credit (ERC) program.
The bad news is that the ERC is ludicrously complex, even by tax-code standards. Don’t ask your volunteer treasurer or part-time bookkeeper to manage applying — pay someone to do it for you.
The goal of this article is not to tell you how to apply for ERC, but rather to help you decide if your church should consider applying — while burdening you with as little complexity as possible.
What is the ERC program?
“The juice is worth the squeeze.”
Your church may have received a tidy sum earlier in the pandemic from the Paycheck Protection Program (PPP), which involved loans that would be forgiven if you retained your employees. ERC was launched at the same time with similar goals, but it’s less well-known, it’s structured differently, and it’s much more complicated.
ERC applies to the last three calendar quarters of 2020 and the first three quarters of 2021. It’s no longer an incentive program — now it’s a look-back program. It’s too late to make employment decisions based on ERC — you either kept your employees during that period or you didn’t. But it’s not too late to take advantage of the program and potentially receive a substantial windfall for your church.
What’s the deadline for applying?
Employers apply for ERC by filing an amended quarterly payroll tax return, Form 941-X, said Kristin Esposito, director for tax policy and advocacy with the American Institute of Certified Public Accountants. “Generally, an employer has three years to file a 941-X to correct the previously filed Form 941.” Form 941s are due the last day of the month following the quarter, so for wages paid in the initial quarter of eligibility — the second quarter of 2020 — the deadline is July 31, 2023.
Why are people not talking more about ERC, the way they did about PPP?
When PPP and ERC were passed together in 2020, you could not apply to both — you had to pick one or the other, Esposito said. “PPP was seen as a better deal,” so there were far fewer applicants for ERC than the government expected, she said.
Congress later eliminated the ban on using both programs — but the outdated idea that you can’t apply for ERC if you got PPP is still out there. (Even the IRS website has it wrong.)
You can’t use the same dollars that were used for PPP to qualify for ERC, “but a lot of employers have enough payroll to cover both,” said Erin Lierheimer, a product manager at Paychex, a large payroll-processing company that offers a service to process ERC applications. ADP, which competes with Paychex in the payroll business, also offers an ERC application service.
How does a church (or other small business) qualify for ERC?
There are two ways to trigger eligibility for ERC.
Trigger 1: Did you experience a significant loss of revenue during any of the last three quarters of 2020 or the first three quarters of 2021, compared with the similar period in 2019? “Significant” basically means 50 percent for 2020 or 20 percent for 2021.
Lots of churches experienced more modest drops in plate and pledge income because loyal parishioners stepped up. But keep reading. The second trigger may affect more churches.
Trigger 2: Did your church fully or partly suspend operations because of government orders regarding, for example, the size of gatherings?
Of course you did. Well, there may be some exceptions, but a lot of churches will qualify this way. For example, if government orders caused you to place any limits on how many people can attend worship services, then you partly suspended operations. (It has to be because of a government order — your bishop’s order doesn’t count.)
How much money can we get?
If you Google “Employee Retention Credit,” you’ll see a zillion ads offering to help you apply for ERC. Many of them will bellow that you can get “up to $26,000 per employee!” — which is true, but that’s the maximum. You probably won’t get that much.
Still, even a smallish church with a handful of employees might realistically qualify for $80,000 to $100,000. And unlike PPP, this isn’t a forgivable loan, it’s a credit. As soon as you get the government check, you can spend it however you like.
What kinds of employees qualify for ERC consideration?
Here’s another bit of bad news, and it uniquely affects churches. ERC is based on the salaries of the FICA-eligible employees you retained. This means clergy salaries cannot be considered for ERC.
Many years ago, for reasons someone thought made sense, clergy were carved out of the FICA system. Some clergy can even apply to be excluded from Social Security and Medicare altogether, but most clergy pay Social Security and Medicare taxes as if they were self-employed — rather than through FICA withholding.
For most small to mid-size churches, clergy salary is the largest component of payroll, but it doesn’t count toward ERC. Even so, non-clergy salaries often make the credit program worthwhile.
How is the amount of the credit calculated?
Don’t even go there.
Seriously, it can’t be that complicated.
Seriously, yes it is. The ERC was created early in the pandemic, and then was modified three times, most recently in November 2021. Google will provide 80,200,000 links for “Employee Retention Credit” — but most of them are obsolete. Anything that hasn’t been revised in 2022 is out of date.
The Internal Revenue Service website has a page of questions and answers about the program. (Think of it as the IRS ERC FAQ.) Under the headline on that page, the first line of bold type reads: “This Page is Not Current.” This is followed by links to a bunch of PDF updates, the first of which is more than 100 pages long — and your eyes will glaze over midway through the first paragraph. Keep in mind that some parts of that document are modified by future PDFs. (Which parts? You’ll have to read the other PDFs to find out.)
The IRS website is worse than useless regarding ERC. It’s confusing, self-contradicting, and, as it says in bold type, the advice is “not current.”
If you really want to try to calculate ERC yourself, a good starting point is an article in Church Law & Tax, a Christianity Today website. Buckle up: it’s 6,000 words, nearly three times the length of this article.
OK, I’m convinced. How much will it cost to pay someone to manage the application?
There’s a thriving industry of ERC preparation services, and they operate under two payment models: flat fee and contingency.
The going rate for contingency providers seems to be 15 percent, although it can range from 10 percent to 25 percent. The fee is paid after the church (or other business) receives a check from the IRS, which can take 10 to 16 weeks or more. A flat fee often ends up being less expensive, but generally must be paid before the IRS check arrives.
Which makes more sense for a church — flat fee or contingency?
Churches tend to be risk-averse and governed by volunteers, and you may understandably be reluctant to shell out thousands of dollars before being absolutely certain how much money you’ll receive from the ERC. Contingency may seem like the safer bet.
On the other side of the argument, both Esposito and Lierheimer said to be cautious of contingency providers. They say some contingency providers may be overly aggressive in applying the IRS rules, which could result in an audit. (CPAs are not allowed to charge contingency fees, and Paychex charges a flat fee.)
Michael Ray is compliance manager for Five Star Tax Resolution, which provides ERC services for a 15 percent contingency. He said flat-fee providers “put a lot of things up on the internet just to validate why they need to be paid upfront.” (He was not responding specifically to Esposito or Lierheimer.)
Regarding a potential audit, “we guarantee our work,” Ray said, “so that if there’s an issue that should arise, we’ll represent you and resolve the issue.”
There are so many outfits advertising for this business — how do I pick a provider?
There are three categories of providers: Payroll firms, certified public accountants, and ERC-specific contingency companies.
Payroll: If you already work with a payroll-processing company like Paychex or ADP that offers an ERC service, it probably makes sense to go with them. They want to protect their long-term relationship with you — they’re not going to charge you a fee that’s out of proportion to the credit.
Lierheimer declined to give specifics of the Paychex fee structure for competitive reasons, but “if your credits are on the low end, we’re not charging you an arm and a leg for this. You’re not going to be charged, you know, 50 percent of your credit, by any means.” Paychex will decrease its fee if necessary, and if it doesn’t make financial sense for you to file, it will be able to tell you that.
Paul VanHuysen, the tax director at ADP, said his firm has a different approach. It usually charges a contingency fee for the service, generally 12 to 15 percent depending on complexity, but will sometimes cap the fee at a certain dollar amount. It also does ERC applications for businesses that do not use its payroll-processing service, although that puts more burden on the client to provide precise payroll information. Paychex provides the service only for payroll-processing clients, although a church or business can qualify for the service by becoming a new payroll client.
CPAs: Business models for certified public accountants vary widely, from sole practitioners to huge consulting firms. Anecdotal evidence suggests that some sole practitioners and small firms don’t want to have anything to do with ERC because it is so complex, and they would have to charge large fees to make it worth their while. Still, if your church has a relationship with a CPA, ask about ERC.
Kaylyn Varnum, coauthor of the Church Law & Tax article, is a partner at Batts Morrison Wales & Lee, a large CPA firm serving nonprofit clients. She told TLC her firm charges $1,500 for an initial evaluation of eligibility for ERC. This will deter many small and medium-size churches, but could be worth considering for a large church with complicated finances, or that operates a school or day-care center. A partner at another large accounting firm, who did not want to be identified, said his company charges $250 per employee per quarter — which would be $7,500 for a church with five employees that has credits for five of the six quarters.
Contingency providers: A contingency-based service has a built-in incentive to maximize the amount of a credit. You want some assurance that the service understands the ERC program and will not play fast and loose with the eligibility requirements.
Some things to consider: How long has the company been in business? Does it provide tax resolution work beyond ERC? Ray said Five Star Tax Resolution has been in business 16 years.
Luke Olson is a non-CPA employee of a Christian nonprofit based in Wisconsin who does ERC business with a partner, operating as Hundredfold Consulting LLC. He told TLC he had submitted eight applications for churches in the last two weeks, charging a 10 percent contingency. He cites Scripture while talking knowledgeably about the ERC program.
“There’s a lot of opportunity for embellishing, and we really need to make sure that we’re not doing that,” Olson said. “And that our clients, who really want and need the money, we need to make sure we’re not talking them into thinking they qualify for quarters that are not really qualified.”
If you’re looking for a contingency provider, ask for recommendations from other churches, your diocese, or small-business owners. Don’t be surprised if you’re met with a blank stare — ERC has not penetrated the public consciousness the way PPP did.
A good starting question is to ask the contingency provider if it makes any difference whether an employee is clergy or non-clergy. If the answer doesn’t line up with what you’ve read here, look elsewhere.
Is the program in any danger of running out of money?
Unlike PPP, there is no set amount of money for ERC — it’s a credit against taxes paid. “If you’re eligible, you’ll get the credit,” Lierheimer said.
What was that deadline again?
To take full advantage of the program throughout the six quarters it existed, the deadline is July 31, 2023. If you miss that, it still may be worth applying, as there are subsequent deadlines every three months for the additional five quarters of the program.
Tick tock. As VanHuysen put it, “the juice is worth the squeeze.”
Kirk Petersen is a longtime member of St. George’s Episcopal Church in Maplewood, New Jersey, and has served on its vestry and finance committee.