Early Childhood Education and Private (K-12) Schools Can Still Take Advantage of the Employee Retention Credit to Help with Closures

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The COVID-19 pandemic has severely impacted many traditional industries, but few have been affected as much as education. Even as retail and travel – two of the most wounded industries – begin to recover, schools and daycares remain subject to health department or similar guidelines that may force temporary closures.

Several weeks ago, we spoke to a client who — up until last week — had only sporadic closures. In a follow-up call, this same client was forced to close three classrooms due to a single infection in each one. These classrooms were filled with about 20 students each, which meant that 60 students were kept out of in-person school. In addition to those 60 students, around 120 angry parents and 9 teachers were all impacted by those 3 infections.

The rate of closures is increasing. These mandates place significant financial burdens on schools, but they may also help schools become eligible for the Employee Retention Credit (ERC). For schools that have faced temporary closures, decreased enrollment, limited capacity, restrictions on tours, or a limitation on extracurricular activities, the ERC can provide substantial financial relief to help with ongoing staffing challenges. The good news is that for-profit schools, non-profit schools, daycares, and early childhood education (ECE) programs generally qualify.

What Is the Employee Retention Tax Credit (ERC)?

The ERC is a refund of wages and health benefits that you have already paid to employees.  Here’s how the ERC works in 2020 versus 2021. For 2020, businesses can receive a payroll tax refund of up to $5,000 per employee for the year. In 2021, that amount increases to $7,000 per employee per quarter for each of Q1, Q2 and Q3.

Companies can determine their eligibility for the ERC based on one of two criteria:

For 2020 eligibility: A gross receipts decline of 50% in any quarter over that same quarter in 2019.

For 2021 eligibility: A gross receipts decline of 20% in Q1 2021 compared to Q1 2019 or a decline of 20% in Q4 2020 compared to Q4 2019.

OR

For eligibility in either 2020 or 2021 (or both): An impact on operations by a state or local government order (e.g., COVID lockdowns, capacity limitations, or social distancing guidelines).

To claim the ERC, a company needs to satisfy only one of the two requirements above.

So, for each W2 employee in your location, your business can receive a payroll tax refund of up to $5,000 per employee in 2020 and up to $21,000 in 2021. If Congress extends the ERC beyond December 2021, the total refund opportunity may increase. It gets a bit complicated to define the eligible hours and wages for each employee, and that’s where outsourcing to a tax expert really comes in handy. A vendor can calculate the credit, prepare the necessary documentation, and provide an audit-ready package.

How Can My School Qualify for the ERC?

Although restrictions on most industries are now lifted, schools must still abide by policies that the Centers for Disease Control (CDC), Department of Health, Department of Children and Families, and other agencies set forth. In fact, many schools are seeing more classroom closures now than they were during the beginning of the pandemic. This stress is compounded by the labor shortage, made even worse by the more stringent credentialing and background screenings required to work with kids.

While the initial waves of COVID-19 largely bypassed student populations, preschool and elementary children now account for a much greater number of cases. This increased prevalence among children has directly caused more classroom closures.

Most of the schools impacted by COVID-19 will qualify for the ERC. This rule generally applies to closures of one day, two weeks, or multiple separate periods. It holds true across non-profit and for-profit schools, as well as individual schools within larger networks.

We often hear from school administrators who believe they are not eligible for the ERC because they didn’t suffer a 50% reduction in gross receipts for 2020 or a 20% decline in gross receipts for 2021. While it is true that meeting these criteria creates eligibility for the ERC, revenue decreases are not necessary. Schools can still qualify as a result of how state agencies dictate operational changes.

How Much Can Schools Get From the ERC?

Consider the school referenced earlier, which has 30 faculty and administrative staff. That school could obtain up to $150,000 for 2020 and up to $630,000 for 2021, offering a combined total refund of almost $800,000. While this number represents the maximum credit allowed, we typically see schools of this size receive about a third of that amount — which is still significant.

While some schools are simply not aware that they qualify, others sometimes miscalculate their credit. If the school is relying exclusively on payroll codes managed by their payroll provider, they are most certainly missing out on the full credit available. For instance, the example school above had claimed only $13,000 through the ERC but was actually eligible for nearly $400,000.

An additional $387,000 would make a difference to any school, even in the best of times. While facing two of the most fiscally challenging years ever seen in modern education, every dollar is important.

How Can Schools Claim the ERC?

To claim the ERC, businesses must establish if they are eligible and the period in which they are eligible. We at Experian do this by analyzing governmental mandates and guidelines that affected your business, and then we determine the duration and materiality of both. Once we figure this out, we then calculate the credit amount in that eligibility period. To do this, we reconstruct your payroll by employee and pay period to determine when employees reach the wage and benefit cap (as defined by the ERC). We also determine the maximum amount we can allocate to each employee without double-dipping against any wages forgiven for PPP purposes.

The easiest way to compile and submit all the necessary documents is to work with a tax professional who specializes in the ERC and the education industry. At Experian, we have extensive experience helping schools calculate and claim the ERC, and we are ready to assist.

To learn more about how the credit might help your school, speak with one of our representatives.

 

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