Churches in Pennsylvania: Yes, You Can Apply for the Employee Retention Credit

Churches in Pennsylvania: Yes, You Can Apply for the Employee Retention Credit

The Employee Retention Credit (ERC) is a form of COVID-19 relief that can be paid as a payroll tax credit, including to eligible Pennsylvania churches. These ERCs are substantial and well worth the time to pursue. Eligible churches have the potential to receive reimbursement of up to 50% of $10,000 paid to each non-clergy employee in 2020 and up to 70% of $10,000 paid to each non-clergy employee per quarter in 2021.

Pursuing the ERC is not ideal for religious organizations that employ only members of the clergy, because clergy members’ FICA-exempt wages are not eligible to be included in the calculation of the credit. Other religious organizations whose principles simply object to mechanisms like tax credits or stimulus money may intentionally ignore the ERC. For those in leadership positions of all other religious organizations, read on.

Church financial leaders may have overlooked the ERC due to some common misconceptions.

It’s not worth pursuing the ERC because we only employ a few part-time, non-clergy employees.

Part-time employees are eligible to be included in the ERC calculations and the credits are proving to be substantial.

We don’t qualify because our church did not experience a decline in revenue.

One popular misconception is that there is only one qualifying economic hardship test, which is based on a decline in revenue. There are multiple avenues for qualification, one of which does not involve economic hardship.

There’s another way for churches to qualify for the ERC

Many religious organizations did not experience declines in revenue throughout the pandemic, unlike many for-profit organizations. So, while it is correct that churches typically will not qualify for an ERC due to economic hardship, they may qualify under another of the hardship requirements: that their operations were “fully or partially suspended” because of Federal, State, or local governmental order.

At the outset of the COVID-19 pandemic, religious organizations in Pennsylvania were defined by Governor Wolf as essential organizations, with their activities segmented into two classes of operations: religious services and “covenants, retreats, and other gatherings.” In theory, this meant that churches could not be forced to close their doors for worship services. Through this lens, if a church voluntarily decided to pause in-person activities, they would not qualify for the ERC.

Despite churches designation as essential, Governor Wolf and the Pennsylvania Department of Health imposed further restrictions on the continuance of in-person operations. This meant that if a religious organization closed in-person worship services due to an inability to comply with governmental orders or compliance resulted in an effect that is greater than nominal to the organization, then the organization could qualify for the ERC.

The “essential” classification protected worship services from mandatory closures but the continuance of in-person operations was contingent upon adherence to governmental orders for in-person public health safety measures. ERC eligibility can be argued if an organization’s inability to adhere to the rules of the in-person order resulted in operational closure.

Church. It’s more than a worship service.

Churches cannot simply or easily be defined as an entity that provides a regular worship service. Churches serve many purposes, which is recognized by the phrase used by the Commonwealth,  “covenants, retreats, and other gatherings.” This terminology refers to all the activities of a church outside of holding a worship service. Many churches have operations that include daycare centers, nurseries, schools, professional services, legal services, personal financial services, faith-based counseling services, extracurricular and athletic activities, men’s and women’s groups, youth programs, and book studies.

The Internal Revenue Service recognizes that entities can have both essential and non-essential operations, affirming that the closure of non-essential operations immediately results in an ERC qualification if the affected operations are more than nominal to the organization:

“…an employer that maintains both essential and non-essential business operations, each of which are more than nominal portions of the business operations, may be considered to have a partial suspension of its operations if a governmental order restricts the operations of the non-essential portion of the business, even if the essential portion of the business is unaffected.” – Internal Revenue Service

An employer can still be eligible for an ERC if non-essential operations are continued remotely if the continued operations are not comparable to operations prior to the governmental order and the effect of the change in operation(s) can still be considered more than nominal to the business. Churches that launched remote services can qualify as well, although those who conducted services remotely prior to the pandemic will have a harder time substantiating qualification for the credit.

So, while it’s not too late to pursue the ERC if your church is interested in doing so it’s best to apply at your earliest opportunity. We are glad to help you through the process. Contact us online or call 215-723-4881.

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