Nonprofit Employee Retention Credit: ERC Eligibility, Calculation, and the IRS Moratorium

Tax-exempt organizations under IRC 501(c) were eligible for the Employee Retention Credit (ERC) on the same basis as for-profit employers. The credit was enacted under the CARES Act (March 2020) and expanded significantly by the Consolidated Appropriations Act (December 2020) and the American Rescue Plan Act (March 2021). For nonprofits, the ERC was particularly valuable because tax-exempt organizations do not pay income tax, which limits their access to most tax incentives. The ERC is a payroll tax credit, refundable against the employer’s share of Social Security tax (and refunded if the credit exceeds the tax), which means nonprofits receive the same dollar benefit as for-profit employers. Many nonprofits that qualified never claimed the credit because their payroll providers or CPAs did not identify the eligibility, and the IRS’s moratorium on new claims (announced September 2023) has complicated late filing.

How does the ERC eligibility test work for nonprofits?

A nonprofit is eligible for the ERC in a given calendar quarter if it meets either of two tests. For current guidance, see IRS Publication 15 (Employer Tax Guide). The suspension test applies when operations were fully or partially suspended by a government order related to COVID-19 (“more than nominal” means the suspended function exceeds 10% of revenue or employee time). The gross receipts test applies when quarterly receipts declined more than 50% versus the same quarter in 2019 (for 2020) or more than 20% (for 2021).

• Suspension test specifics for nonprofits. Physical location closed or restricted, in-person programming cancelled or reduced, or mission-critical activities restricted by government order. The suspension must be caused by a government order, not by the organization’s voluntary decision to close. But a nonprofit that reduced operations because a government order limited gathering sizes does qualify.
• Gross receipts. Includes contributions, grants, program service revenue, membership dues, and investment income. Government grants received (PPP, CARES Act) count toward the quarter’s receipts, which can create a situation where a distressed quarter shows an increase due to relief funding.

Test 2: Significant decline in gross receipts. The nonprofit’s gross receipts for a calendar quarter declined significantly compared to the same quarter in 2019. For 2020, “significant decline” means a decline of more than 50%. For 2021, the threshold was reduced to more than 20%.

For nonprofits, “gross receipts” includes: contributions and grants, program service revenue, membership dues, investment income, and any other receipts. Government grants are included in gross receipts. For organizations that received large government grants specifically related to COVID-19 (CARES Act funding, PPP loans that were forgiven, state relief grants), those amounts are included in gross receipts for the quarter received, which can create a situation where a quarter that felt economically distressed actually shows an increase in gross receipts because of the relief funding.

The gross receipts test is applied quarter by quarter. A nonprofit might qualify in Q2 2020 (when contributions dropped) but not in Q4 2020 (when year-end giving recovered). Each quarter is evaluated independently.

How is the credit calculated?

The credit equals a percentage of qualified wages per employee, with the rate and cap varying by year. For 2020, the credit is 50% of up to $10,000 in qualified wages per employee for the full year (maximum $5,000 per employee). For 2021 Q1-Q3, the credit is 70% of up to $10,000 per employee per quarter (maximum $21,000 per employee for the year). Qualified wages include the employer’s share of health plan costs, which is often overlooked and can increase the credit by 20-30%.

2020 credit:

• Credit rate: 50% of qualified wages
• Wage cap: $10,000 per employee for the entire year
• Maximum credit: $5,000 per employee for the year
• Large employer threshold: 100+ full-time employees (monthly average in 2019)

2021 credit (Q1-Q3 only; Q4 was retroactively repealed for most employers):

• Credit rate: 70% of qualified wages
• Wage cap: $10,000 per employee per quarter
• Maximum credit: $7,000 per employee per quarter ($21,000 per employee for Q1-Q3)
• Large employer threshold: 500+ full-time employees (monthly average in 2019)

What are “qualified wages”? The definition depends on whether the employer is a “large” or “small” employer:

For small employers (under 100 FTEs in 2020, under 500 FTEs in 2021): qualified wages include all wages paid to all employees during the eligible quarter, regardless of whether the employees were working or not. This is the broader definition and benefits most nonprofits, which typically have fewer than 100 or 500 employees.

For large employers (100+ FTEs in 2020, 500+ FTEs in 2021): qualified wages include only wages paid to employees who were NOT providing services during the eligible quarter (employees who were furloughed or whose hours were significantly reduced). Wages paid to employees who continued working do not qualify.

Qualified wages include: gross wages, salary, tips, and the employer’s share of health plan costs allocable to qualified wages. The health plan cost component is often overlooked and can increase the credit by 20-30% for employers with generous health benefits.

Interaction with PPP. Wages used to support PPP loan forgiveness cannot also be used for the ERC. This was not the case under the original CARES Act (which prohibited ERC for PPP borrowers entirely), but the Consolidated Appropriations Act retroactively allowed ERC for PPP borrowers, provided they do not double-count the same wages. The organization must allocate wages between PPP and ERC to maximize the combined benefit, and the allocation should be done deliberately (not by default).

What’s the IRS moratorium?

In September 2023, the IRS imposed a moratorium on processing new ERC claims after widespread fraudulent filings by “ERC mills.” The backlog is being processed slowly with a high denial rate, and the IRS has offered a Voluntary Disclosure Program for employers who received erroneous credits. The moratorium has been partially lifted, but new claims face heightened scrutiny and processing delays of 12 to 18 months or longer. Nonprofits that legitimately qualify should still file with professional preparation and thorough documentation.

• Filing is still technically possible, but the statute of limitations for 2020 claims (three years from the original filing date) has largely passed; 2021 claims have until April 2025 for most quarterly filers.
• The IRS flags all post-moratorium claims for additional review. Professional preparation (CPA review of eligibility, wage calculations, and PPP allocation) is essential.
• Nonprofits should not use contingency-fee ERC promoters. The IRS treats contingency-fee arrangements as a red flag, and many promoted claims have been denied or penalized.

What documentation should a nonprofit maintain?

The IRS has signaled that it will audit ERC claims aggressively, and nonprofits should maintain thorough documentation in three areas: the government orders that caused a full or partial suspension of operations (with a narrative linking each specific order to specific operational impacts), quarterly gross receipts for 2019 through 2021 for the comparison test, and detailed payroll records with health plan cost allocations for the wage calculation.

• Suspension test documentation. Copies of the government orders, a narrative description of how each order affected the organization’s specific operations (not a generic COVID statement), and documentation of the suspended operations’ share of total revenue or employee time (to support the “more than nominal” threshold).
• Gross receipts test. Quarterly gross receipts for 2019, 2020, and 2021, reconciled to the financial statements or Form 990.
• Wage calculation. Payroll registers for each eligible quarter showing gross wages by employee, health plan cost allocation (employer’s share of premiums), identification of wages used for PPP forgiveness, and (for large employers) documentation of which employees were not providing services.

What should I do next?

If your nonprofit has not evaluated ERC eligibility, the evaluation should happen now, before the statute of limitations closes on remaining quarters. If you received an ERC payment and are uncertain about the eligibility, review the claim with a CPA (not the promoter who filed it). If you received a denial letter, evaluate whether the denial is correct or whether an appeal or refiling is warranted.

• Nonprofit Form 990 filing guide, the annual return where payroll and employment tax information is reported
• Church bookkeeping, the parallel ERC eligibility analysis for churches (which qualify under the same rules but face additional documentation challenges because of the church audit limitations under IRC 7611)
• Nonprofit governance, the board oversight that should review the ERC claim before filing
• Nonprofit UBIT, the separate tax obligation that exists alongside payroll tax credits
• IRS accuracy-related penalty, the penalty exposure if an ERC claim is denied and the organization has already spent the refund

Related guides:

• Employee Retention Credit (ERC) Status for Small Businesses in 2025

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.