At the start of the COVID-19 pandemic, few institutions were required to adapt so quickly to operating restrictions as learning institutions. To help post-pandemic recovery, private schools may be able to file for the Employee Retention Credit (ERC) for qualifying quarters. However, several factors must be taken into account when determining eligibility. Remote learning changed teaching and learning procedures, requiring everyone involved to get up to speed quickly. In some cases, teachers were working the same or more hours to accommodate the new learning format. While some private schools may have offered discounts due to the limitations of distance learning, some may have experienced higher enrollment numbers. This overview of the ERC for private schools will explore common misconceptions about the credit and explore an eligibility pathway for private schools still working toward financial recovery. This understanding of eligibility is a crucial step and should be undertaken by every employer based on their own facts and circumstances before filing an ERC claim.
Background on the ERC
The ERC is a tax credit introduced in the CARES Act to provide financial relief to employers impacted by the COVID-19 pandemic. The credit is available to employers who experienced either a significant decline in gross receipts or were at least partially suspended due to government orders. To qualify for the credit, employers must meet certain eligibility criteria and file the necessary paperwork, Form 941-X, with the IRS.
Qualified wages of large eligible employers are limited to those wages paid for time employees were not providing services. Qualified wages for small eligible employers, however, include all taxable wages for all employees during the period in which the employer was considered an eligible employer. The ERC definition of a large employer is different for 2020 than 2021. While in 2020, an employer was considered large if they averaged more than 100 full-time employees during 2019, in 2021, they were large if they averaged more than 500 full-time employees during 2019.
The ERC is a valuable tool for businesses to help offset the financial impact of the pandemic after having retained their employees.
Common Misconceptions Related to the ERC for Private Schools
As mentioned previously, unique factors facing schools result in several common misconceptions regarding the ERC. These often result in private schools disqualifying themselves from eligibility without further research.
For the 2020-21 school year, schools were open under hybrid models or with social distancing restrictions. Many schools feel that since they never fully shut down during the school year, they do not qualify. In most cases however, many services of the schools were impacted. Because of COVID restrictions, schools typically had to cancel before- and after-school programs, sports, band, drama, field trips and other areas of enrichment.
Some schools were also unable to take on new students due to capacity limits from COVID mandates that dealt with social distancing.
In other instances, key fund-raising events for schools had to be canceled.
Another common misconception is related to gross receipts. An increase in gross receipts does not automatically disqualify a school from ERC qualification. A school may have suffered negative impacts due to government-ordered restrictions and the sum of those impacts could qualify them for the ERC.