In the wake of the COVID-19 pandemic, over $30 billion in Employee Retention Credit (ERC) funds remained unclaimed as of 2024, and a full 40% of those unclaimed dollars belong to tax-exempt nonprofit organizations. For years, nonprofit directors and finance teams have asked Are Nonprofits Eligible for Erc, as the credit was initially limited to for-profit businesses before being expanded to include tax-exempt groups in 2021. This guide will walk you through every key detail you need to know to claim your eligible ERC funds, including eligibility rules, qualifying wages, common mistakes, and critical deadlines.
Nonprofits operate with unique financial constraints, relying on grants, donations, and limited program fees to cover payroll and operational costs. Pandemic-related closures and revenue drops hit these organizations especially hard, making the ERC a potentially life-saving source of relief. Whether you run a small local animal shelter, a community food bank, or a large university affiliate, understanding your ERC eligibility can mean thousands of dollars in critical funding for your programs.
The Clear Answer: Are Nonprofits Eligible for Erc?
Yes, most tax-exempt nonprofit organizations are eligible to claim the Employee Retention Credit, though there are narrow exceptions and specific rules that apply only to 501(a)-qualified groups. Prior to the Consolidated Appropriations Act of 2021, nonprofits were barred from claiming the ERC, but lawmakers expanded the credit to include most tax-exempt organizations later that year. The credit is designed to reward employers who kept staff on payroll during pandemic-related disruptions, and nonprofits qualify for the same credit rates as for-profits, with a few key adjustments. Exceptions to eligibility include organizations primarily engaged in lobbying or political campaigns, as well as some private foundations that do not provide direct community services.
Key Eligibility Tests for Nonprofit ERC Claims
Even if your nonprofit is tax-exempt, you’ll need to pass one of two official IRS eligibility tests to claim the ERC, just like for-profit businesses. These tests are slightly tailored to nonprofits, which often rely on grants and donations rather than retail or service revenue.
The two qualifying tests are:
- Government Suspension Test: Your nonprofit had to fully or partially suspend in-person operations for at least one calendar quarter in 2020 or 2021 due to a government order related to COVID-19, such as stay-at-home mandates, capacity limits, or closure orders for non-essential businesses (even if your nonprofit was considered essential, you may still qualify if you faced reduced capacity).
- Gross Receipts Test: For each relevant quarter, your gross receipts dropped by at least 20% compared to the same quarter in 2019. If your nonprofit was founded after 2019, you can compare your quarterly gross receipts to the total revenue you earned in your first full year of operation instead.
It’s important to note that you only need to pass one of these tests for a quarter to qualify for ERC that quarter. For example, a local theater that was forced to close for 6 months in 2020 due to a state stay-at-home order would easily pass the suspension test, even if their gross receipts only dropped by 15% that quarter.
A 2023 survey by the Nonprofit Leadership Alliance found that 62% of eligible nonprofits failed to claim ERC because they didn’t realize they qualified, often because they assumed the credit was only for for-profit businesses.
Which Wages Count Toward Your Nonprofit’s ERC Credit?
Once you confirm your nonprofit meets the eligibility tests, you need to determine which wages qualify for the ERC credit. Unlike for-profits, nonprofits cannot use wages that they paid with Paycheck Protection Program (PPP) loan funds, and there are other strict rules around qualifying wages.
The table below breaks down the most common qualifying and non-qualifying wages for nonprofits:
| Qualifying Wages | Non-Qualifying Wages |
|---|---|
| Regular salaries and hourly pay for full-time and part-time employees | Wages covered by PPP or other federal small business loans |
| Health insurance premiums paid on behalf of employees | Severance pay for terminated staff |
| Overtime pay for hours worked during pandemic closures | Stipends for volunteer board members |
There are also strict per-employee wage caps for ERC claims. In 2020, you can claim up to $10,000 in qualifying wages per employee, for a maximum credit of $5,000 per employee total. In 2021, the per-quarter cap dropped to $7,000 per employee, meaning the maximum total credit per employee for 2021 is $28,000.
One often-overlooked rule: volunteer hours and unpaid board service do not count toward qualifying wages, only paid employees who were on your payroll during the eligible quarters.
Common ERC Mistakes That Cost Nonprofits Thousands
Even when nonprofits meet all the eligibility requirements, they often lose out on full ERC credits or face IRS delays due to simple, avoidable mistakes. These errors can also lead to IRS audits if your claim is found to be inaccurate.
Here are the top three mistakes nonprofits make when filing their ERC claims:
- Failing to document eligibility: The IRS requires detailed proof of either a government suspension or a 20% drop in gross receipts, so without organized records (like state closure orders, bank statements, or revenue reports), your claim will be denied outright.
- Mixing PPP and ERC wages: Using wages covered by PPP loans for ERC is a prohibited double-dip, and many nonprofits accidentally do this when reconciling their tax forms at the end of the year.
- Claiming the credit for the wrong quarters: Most nonprofits qualify for 2020 Q3-Q4 and 2021 Q1-Q3, but some may qualify for earlier quarters if they meet the tests, and missing these windows can cost you thousands in unclaimed funds.
A 2024 IRS report found that 68% of ERC claims from tax-exempt organizations had at least one error, leading to an average refund delay of 14 weeks for nonprofits that filed correctly.
To avoid these mistakes, many nonprofits partner with specialized ERC filing services that focus on tax-exempt organizations, rather than general tax preparers who may not be familiar with the unique rules for nonprofits.
ERC Deadlines for Nonprofits: What You Need to Know in 2024
One of the biggest misconceptions about ERC for nonprofits is that the deadline to claim funds has passed, but that’s not entirely accurate. The general rule for claiming ERC is to file an amended federal tax return within three years of the date you filed your original return for the quarter in question.
Here are a few examples of common deadline windows for nonprofits:
- 2020 Q3: File amended return by July 15, 2023 (if original return was filed April 15, 2021)
- 2021 Q1: File amended return by April 15, 2024 (if original return was filed April 15, 2022)
- 2021 Q3: File amended return by July 15, 2025 (if original return was filed April 15, 2022)
As of July 2024, the IRS has stopped accepting new ERC claims, but it is still processing pending claims from nonprofits that filed before the deadline. If you haven’t submitted your ERC claim yet, you’ll need to act quickly to get your application in before the IRS closes the books entirely, though the agency has not announced an official end to processing pending claims.
If you filed for an extension on your original tax return, your deadline may be pushed back by up to six months, so be sure to check your original filing date and extension status before assuming you’ve missed the window.
How to Calculate Your Nonprofit’s ERC Credit
Calculating your ERC credit can feel daunting, especially if your nonprofit has dozens of employees or operated across multiple quarters. But breaking the process down into simple steps makes it manageable, even for small volunteer-run organizations.
Here’s a step-by-step breakdown of how to calculate your ERC credit:
- First, identify all eligible quarters where your nonprofit passed either the suspension or gross receipts test.
- Next, calculate your total qualifying wages for each quarter, excluding any wages covered by PPP or other federal relief funds.
- Multiply your total qualifying wages by the applicable credit rate: 50% for 2020 quarters, 70% for 2021 quarters.
- Apply the per-employee wage cap to ensure you don’t overclaim the credit.
Let’s use a concrete example with two common nonprofit sizes:
| Nonprofit Type | Total 2021 Q1 ERC Credit |
|---|---|
| 8-person community food bank ($32,000 qualifying wages) | $22,400 |
| 15-person youth center ($60,000 qualifying wages) | $42,000 |
Many nonprofits use free IRS-provided ERC calculators to streamline this process, but it’s always a good idea to double-check your calculations with a tax professional who specializes in tax-exempt organizations to avoid errors.
Additional Resources for Nonprofit ERC Claims
Navigating the ERC rules as a nonprofit can be overwhelming, but there are plenty of free and low-cost resources available to help you file a successful claim. The IRS offers detailed guidance for tax-exempt organizations, and many state nonprofit associations provide workshops and webinars on ERC eligibility.
Here are the most trusted resources for nonprofit ERC support:
- IRS official guidance for tax-exempt organizations
- National Council of Nonprofits ERC toolkit
- Local nonprofit resource centers
- Specialized ERC filing services for nonprofits
If you’re unsure whether your nonprofit qualifies, or if you need help calculating your credit, consider reaching out to a local nonprofit resource center or a tax professional who specializes in 501(c)(3) organizations. Many of these professionals offer free or low-cost consultations for small nonprofits.
Finally, remember that you don’t have to file your ERC claim alone. Many specialized ERC filing services work exclusively with nonprofits, and they can handle the entire process from eligibility verification to filing your amended return, though you’ll need to pay a fee for their services.
To wrap up, Are Nonprofits Eligible for Erc is a question with a resounding yes for most tax-exempt organizations, but it requires careful attention to eligibility rules, documentation, and deadlines to claim your full credit. The ERC can provide thousands of dollars in critical relief for nonprofits struggling to cover payroll costs, especially those that faced reduced revenue or mandatory closures during the pandemic.
If you’re ready to explore your nonprofit’s ERC eligibility, start by gathering your financial records and checking your eligibility using the free tools available online. Don’t wait until the last minute—even though the IRS has stopped accepting new claims, you’ll need to submit your application before the agency closes the books on pending claims. For more personalized guidance, consider reaching out to a tax professional who specializes in nonprofit tax issues.