employee turnover can be a significant challenge for any organization, including nonprofits. Losing valuable employees not only causes disruptions in the workflow but also increases recruitment and training costs. Recognizing the importance of employee retention, the government has introduced the employee retention credit (ERC) to incentivize employers to keep their workforce intact. This article explores how nonprofits can maximize employee retention by unlocking the benefits of the employee retention credit.
The employee retention credit is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in response to the economic impact of the COVID-19 pandemic. Originally, it was designed to help businesses affected by government-mandated shutdowns or significant revenue losses. However, nonprofits were also included in the category of eligible employers, allowing them to take advantage of this credit.
To qualify for the employee retention credit, nonprofits must meet specific criteria. First, they need to demonstrate a significant decline in receipts, explained as a 50% decrease in gross receipts when comparing any quarter in 2020 to the same quarter in 2019. Alternatively, organizations can utilize the safe harbor rule, which considers a significant decline if gross receipts in any quarter of 2020 are less than 50% of the gross receipts in the same quarter of 2019.
Once eligibility is established, nonprofits can claim the employee retention credit for a portion of qualified wages paid to their employees. Qualified wages are limited to $10,000 per employee per quarter. The credit itself is equal to 50% of qualified wages, allowing organizations to receive up to $5,000 in credits per employee for the entire year. Importantly, this credit applies to both full-time and part-time employees, even those who are not currently working due to the pandemic.
One of the significant advantages of the employee retention credit is its refundable nature. This means that if the credit exceeds the payroll tax liability of the nonprofit, the excess can be refunded to the organization. For cash-strapped nonprofits, this can provide much-needed financial relief, which can be allocated towards enhancing employee retention efforts.
Maximizing employee retention with the help of the employee retention credit requires strategic planning and implementation. Here are a few steps nonprofits can take:
1. Review eligibility: Nonprofits should analyze their financial records to determine if they meet the requirements for the employee retention credit. Consulting with tax professionals or accountants can ensure accurate evaluation and compliance.
2. Identify qualified wages: Reviewing the organization’s payroll records is crucial to identify qualified wages that can be used to claim the credit. Clearly segregating qualified wages per quarter will simplify the credit calculation process.
3. Develop retention strategies: Though the employee retention credit can provide short-term financial relief, it is essential to focus on long-term employee retention strategies as well. Engage with employees, provide professional development opportunities, and create a positive work environment to foster loyalty and job satisfaction.
4. Seek professional assistance: Navigating tax credits and compliance regulations can be challenging, especially for nonprofits. Partnering with professionals well-versed in nonprofit accounting and tax regulations can help maximize the benefits of the employee retention credit while ensuring compliance.
By unlocking the benefits of the employee retention credit, nonprofits can address the financial challenges posed by the pandemic while investing in their workforce. The credit not only provides immediate financial relief but also encourages organizations to prioritize employee retention. Ultimately, this helps nonprofits maintain operational stability, deliver on their mission, and create a positive impact in their communities.