Business owners dealing with the economic hardships caused by the coronavirus pandemic can take advantage of two important resources: the Payment Protection Program (PPP) and the Employee Retention Credit (ERC).
The Employee Retention Tax Credit reduces the employer's payroll tax liability and provides a direct tax benefit for employers. The PPP is a loan program created by the CARES Act that allows businesses to borrow money to cover payroll and other expenses.
As a Chicago-based CPA firm, we've come across many eligible employers and businesses that are aware of them but don't know they can qualify for both.
In this article, we'll cover what they are, the eligibility requirements, and how to apply them to maximize benefits.
The Small Business Administration (SBA) administers the Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small businesses keep their workforce employed during the economic downturn caused by the coronavirus pandemic.
Qualifying small businesses can receive loans of up to $10 million if employers maintain or quickly rehire employees and maintain salary levels. If you submit a forgiveness application and demonstrate that you utilized the loan funds to pay for rent, utilities, payroll costs, and other eligible expenses, the loan will be forgiven.
Employers facing financial hardship resulting from the COVID-19 pandemic can take advantage of the Employee Retention Credit (ERC), a refundable tax credit intended to encourage employers to maintain their workforce.
Qualifying employers and borrowers who took out a Paycheck Protection Program loan could previously claim up to 50% of qualified wages paid, including eligible health insurance expenses.
However, the Consolidated Appropriations Act (CAA) has expanded the Employee Retention Credit (ERC) so that employers who qualify in 2021 can now claim a credit of 70% on qualified wages.
Learn more about ERC in our Employee Retention Credit Guide.
Who Is Eligible for ERC?
To be eligible for the Employer Retirement Contribution (ERC) program in 2020, you must meet the criteria of an acceptable employer:
- Have operations partially or fully suspended due to the government order related to COVID-19;
- Have gross receipts for any 2020 quarter less than 50% of the same quarter in 2019. This credit is equal to 50% of the first $10,000 you pay in qualified wages per employee in Q2, Q3, and/or Q4 of 2020, up to a maximum of $5,000 per quarter per employee.
To be eligible for ERC in 2021, you must fulfill the following criteria:
- Have operations partially or fully suspended due to the government order related to COVID-19;
- Have gross receipts for any 2021 quarter less than 80% of what they were in the same quarter of 2019. If you apply and are approved, you will receive 70% of the first $10,000 you pay in qualified wages for each employee during the four quarters of 2021. The maximum ERC for each quarter is $7,000 per employee, and the maximum total ERC per employee for the year is $28,000.
To reiterate: The PPP loan and Employee Retention Credit are beneficial programs to help struggling businesses. The ERC is a refundable tax credit for employers experiencing economic hardship due to the pandemic and who keep their employees' salaries at pre-pandemic levels.
The PPP, conversely, is a loan program providing small businesses with funds to cover payroll and other expenses, which can be forgiven if specific criteria are met. Although the ERC and PPP are advantageous, they are not interchangeable; each has distinct eligibility requirements and benefits.
There are three main distinctions between the Payroll Protection Program and Employee Retention Credits: the form of funding provided, the timing of when businesses receive the funding, and the program's cost.
Type of Funding
If you are eligible for the PPP, you can receive a forgivable loan to cover payroll, rent, and other qualifying expenses; you won't need to repay this portion. However, if you spend part of it on non-qualifying purposes, you must pay it back with an interest rate of 1% over two or five years. The Employee Retention Credit (ERC) is different; it is a tax credit you don't have to repay.
Maximum Credit/Loan Amount
The maximum loan amount for the Paycheck Protection Program is $10 million, and the maximum employee retention credit is $5,000 per employee.
Funding Time
If you qualified for the PPP loan, the funds would typically be sent to you via direct deposit within ten days of approval. For the Employee Retention Credit (ERC), however, you must file Form 941-X with the IRS and wait for them to review your claim. It may take the IRS between 3-6 months+ to process your credit and send you a check.
Cost
Applying for the PPP loan is free of charge, and you will only be required to pay back the loan if you do not use the proceeds for eligible expenses. Moreover, there is no government fee to receive the Employee Retention Credit (ERC) either.
This tax credit can be claimed when filing an amended payroll tax form for the applicable tax periods. However, you may incur service charges if you seek the help of an accountant or tax professional to help you prepare and file your tax forms.
Yes, the Consolidated Appropriations Act makes it possible to receive both. However, you have to use different wages when applying for each program.
Remember, while the PPP loan helps businesses keep their employees on the payroll, the ERC encourages employers to maintain their workforce by providing a refundable tax credit. As such, different qualifications apply to each program.
According to the IRS, payroll costs reported on a PPP application for forgiveness in 2020 are not eligible for the ERC. However, an employer receiving a PPP loan can still claim the ERC if:
- A controlled group member is receiving the PPP loan, but another member of the group not receiving the PPP applies to claim the ERC;
- The PPP loan does not provide the employer's qualifying wages;
- The employer obtains qualifying wages with proceeds from a forgiven PPP loan, but the forgiveness is not for the same wages as the ERC qualifying wages.
Claiming Both the ERC and PPP: Things to Consider
The CAA recently implemented four retroactive changes to the law in 2020 related to the Employee Retention Credit (ERC). Therefore, you may now qualify to claim the ERC for 2020 wages, even if you had a 2020 PPP loan.
However, you cannot claim the ERC on wages used for PPP loan forgiveness. You also have the option to elect not to claim the ERC to increase the amount of tax-free PPP money you receive.
If your lender denies your loan forgiveness, you can still claim the ERC for qualified wages even if you decide not to claim the ERC for them.
According to the IRS, you have a three-year statute of limitations to amend payroll tax returns, just as you would for income tax returns.
On quarterly Form 941s filed during a calendar year, the statute of limitations begins on April 15 of the following year. So, by precisely deciding which wages to use for the ERC and which to use to generate PPP loan forgiveness, you can maximize the benefits of these changes.
Combining ERC and PPP: Examples
Combining the Employee Retention Credit (ERC) with the Paycheck Protection Program (PPP) allows businesses to maximize the financial support they receive.
Here is how to allocate wages between PPP and ERC:
Let's say you have at least $60,000 in eligible payroll costs to get full forgiveness of your PPP loan of $100,000 during the tax year 2020, and you had at least $40,000 in other eligible expenses.
Assuming you had $110,000 in payroll costs during the covered period, which is qualified wages for the ERC, and $50,000 in other eligible expenses, you will receive full forgiveness.
Example 01: On your approved PPP loan forgiveness application, you indicated that you have $110,000 in payroll costs but no other eligible expenses.
Result: You have chosen to refrain from taking advantage of the Employee Retention Credit (ERC) on $100,000 of qualified wages, the minimum required for full loan forgiveness according to your submitted application. The additional $10,000 of wages is eligible for the ERC.
Example 02: On your denied Paycheck Protection Program (PPP) loan forgiveness application, you listed $110,000 in payroll costs and $50,000 in other eligible expenses.
Result: All of the $110,000 in qualified wages is eligible for the Employee Retention Credit.
To gain the most advantages from both the PPP and ERC, you should consider the following options:
- To qualify for full PPP loan forgiveness, demonstrate you used at least 60% of the loan on payroll costs. Also, include non-payroll costs in your application;
- If you don't include eligible non-payroll costs, you must demonstrate that 100% of the loan amount for payroll expenses was used to qualify for loan forgiveness;
- Provide your tax professional with detailed information on how government regulations affect your business. This includes procedure modifications, policies, or operations necessary to respond to the order. Provide examples of losses incurred due to the regulations, and explain how they financially impacted your business;
- Separate total payroll costs used for the PPC loan from the total payroll costs listed with the ERC to prevent getting denied from both programs;
- Hire a tax expert. They can ensure that your tax credit is correctly filed so that if you are audited, all your documents are complete and accurate.
You can apply for the ERC by filling out the online application document and submitting it to an authorized lender to apply for ERC. Additional documents, such as photocopies of your company's employment tax forms and payroll ledgers, are required when applying for the loan.
Unfortunately, you may not apply for a PPP loan as it is no longer officially available for businesses. However, existing borrowers may be eligible for PPP loan forgiveness.
How Do I Apply for PPP Loan Forgiveness?
Here's how to apply for loan forgiveness:
- Determine your loan eligibility: Ensure your business is eligible for PPP loan forgiveness. You must have used the funds for the purposes outlined by the SBA;
- Gather documents and information: Compile the documents and information required, including payroll records, proof of your payroll costs, IRS forms, etc;
- Prepare the PPP loan forgiveness application: Use the official PPP loan forgiveness application form on the SBA website;
- Submit the application and supporting documents: Double-check you have submitted all the relevant documents needed to support your application;
- Await the decision: The SBA reviews your application and decides whether or not to grant the loan forgiveness. This process can take several weeks or months;
- If not approved, begin repayment: You must repay the loan according to the repayment terms.
How Do I Apply for Employee Retention Credit?
You can lower your tax obligations by not sending contributions to the IRS and keeping them instead. Using Forms 941, 944, or 943, you can claim a refund on your Federal Hiring Tax Return.
Here's how:
- Find out if you qualify: To determine if your company is eligible for this benefit, you should speak with your accountant or Certified Public Accountant (CPA);
- Collect payroll information: Employers eligible for the Employee Retention Credit must have paid a portion of their employees' gross wages for each quarter in 2020 and 2021;
- Obtain documents: Gather information on any Paycheck Protection Program (PPP) loans you have taken, including the date the loan was granted and the amount. Then, use your PPP loan documents to calculate the amount of Employee Retention Credits (ERCs) you are eligible for;
- Get revenue info from sales: To be eligible, you must have sales income from 2019 to 2020. This is not applicable if your organization has fewer than 100 employees.
In these challenging times, businesses striving to keep their staff can benefit from the Employee Retention Credit and the Paycheck Protection Program. With so much going on, the paperwork and applications can take away from the vital day-to-day operations of your business.
Why not let professionals handle it?
Lewis CPA is a Certified Public Accountants firm that has helped many clients get ERC with maximum benefits and minimal worry. Contact us to see if you are eligible.
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