Employee Retention Credit vs PPP: Can I Claim Both?

By the end of December 2020, 11,675,213 loans were granted under the PPP (Paycheck Protection Program), each with an average loan amount of $65,787.

Aside from the PPP, businesses were allowed to benefit from employee retention credits. These credits were specifically designed to aid businesses in retaining their workforce amidst the challenges posed by the COVID-19 pandemic. Surprisingly, a mere eight percent of business owners took advantage of this tax credit in 2020.

If you are unfamiliar with these assistance programs aimed at supporting businesses that have suffered losses during the pandemic, you’re in the right place. In the following paragraphs, we will explain these programs, guide you through the application process, and address the question, “Can I receive both the Employee Retention Credit and PPP?”

Introduction to the Employee Retention Credit

The ERC is a federal tax refund credit designed to encourage businesses to retain their staff during the challenging times of the COVID-19 pandemic. The credit provides financial relief to eligible employers who experienced a sharp decline in revenue or were subject to government-mandated closures or restrictions.

The ERC was introduced as part of the CARES Act in 2020 and has undergone updates and expansions through subsequent legislation. Initially, it was only available to businesses that still needed to receive a Paycheck Protection Program loan. However, the eligibility criteria were expanded to include PPP loan recipients in later legislation.

To qualify, businesses need to meet specific requirements, such as a decline in gross receipts compared to a comparable period before the pandemic or being fully or partially suspended due to government orders. The specific criteria for calculating the decline in gross receipts vary depending on the applicable period.

The ERC provides eligible employers with a refundable tax credit that can be used to offset certain employment taxes. The refund is based on qualified paid employee wages during the eligible period. Initially, the credit covered 50% of qualified wages up to a specific limit, but subsequent legislation increased the credit rate and expanded its scope.

Employers can claim the ERC on their employment tax returns, and any tax credit excess can be refunded. It is important for employers to maintain proper documentation to support their eligibility and the amount of the credit claimed.

The ERC has played a vital role in supporting businesses during the economic challenges caused by the pandemic. By providing a financial incentive to retain employees, the credit helps to mitigate layoffs and maintain workforce stability. This benefits both businesses and employees by preserving jobs and promoting economic recovery.

Employers should stay informed about the eligibility criteria and any updates related to the ERC. Consulting with tax professionals or accessing official government resources can provide accurate guidance on understanding and maximizing the ERC’s benefits.

Who Has Eligibility?

To be eligible for Employee Retention Credit (ERC) in 2020, specific criteria must be met as an eligible employer:

• Partial or complete suspension of business operations due to COVID-19 government orders.
• Gross receipts in 2020 for any quarter must be less than 50 percent compared to the corresponding 2019 quarter.

If your business meets the eligibility requirements and submits an application to the ERC, you can receive a credit of 50% on the very first $10,000 of qualified wages paid to each employee during quarters 2, 3, and/or 4 in 2020. This means that the maximum credit per employee per quarter is $5,000.

For the 2021 ERC, these criteria must be satisfied:

• Partial or complete suspension of business operations due to COVID-19 government orders.
• Gross receipts for quarters 1,2,3 and 4 in 2021 need to be less than 80 percent compared to the corresponding quarter in 2019.

How to Allocate Wages

If eligibility is met and you apply for the ERC in 2021, you can get 70% of the first $10,000 in wages paid to each employee for each quarter of the year. The maximum credit per employee for each quarter is set at $7,000, and the original maximum per employee total credit in the year was $28,000.

However, please note that the fourth quarter of 2021 was later excluded from the eligible period, reducing the maximum total credit for the year to $21,000 per employee. Nevertheless, there are specific circumstances where you may still be able to recover the ERC for the fourth quarter.

It is essential to stay updated on the specific eligibility requirements and any changes related to the ERC. Seeking professional guidance or referring to official sources can provide accurate information and ensure compliance with the program’s guidelines.

What is the Payroll Protection Program?

The CARES Act established the PPP to assist businesses in maintaining cash flow during the COVID-19 pandemic. The program offers businesses 100% federally guaranteed loans that cover eight weeks of expenses, aiming to support businesses that retain their employees.

Loans obtained through the PPP can be fully forgiven if the funds are used for specific purposes such as payroll costs, business mortgage payments, rent, or utilities. An application must be submitted before the loan maturity date to qualify for loan forgiveness. Please apply within the specified timeframe to avoid the loan payment being deferred, and the lender will require repayment.

When applying for the PPP, you must complete one of the designated forms: SBA form 3508, 3508EZ, 3508S, or an equivalent form accepted by your lender. Along with the application, you must provide supporting documentation, including payroll and tax forms and documents substantiating business expenses. These documents are essential in the assessment of your eligibility for the program.

It is important to note that the provided summary is based on general information about the PPP, and specific details and requirements may vary. When applying for the Payroll Protection Program, it is recommended that you consult with your lender or refer to official sources for the most accurate and up-to-date information.

Key Differences Between PPP and ERC

When comparing the ERC and PPP, three main areas of difference emerge: the nature of funding, the timing of funding receipt by businesses, and the cost implications.

1. Nature of Funding

Under the PPP, businesses receive forgivable loans that do not need to be repaid if they adhere to the loan conditions. These conditions typically involve using the funds for designated purposes such as payroll or rent expenses.

In contrast, the ERC operates as a tax refund/credit that businesses receive as a check from the IRS. This credit does not require repayment and functions independently of loans.

2. Timing of Funds Received

For PPP, businesses typically receive the funds directly into their bank accounts shortly after loan approval, usually within a week.

In the case of the ERC, businesses acquire the credit when they file their quarterly Form 941. The credit is applied against the payroll taxes collected from employees during the payroll processing.

3. Cost Implications

Businesses do not have to pay upfront costs to apply for a PPP loan. The only potential expense is if the loan amount is not fully utilized in accordance with the loan terms.

On the other hand, the ERC itself is free. It functions as a deduction claimed during the completion of quarterly tax returns. The only fee that may arise is if a business opts to utilize a service for filing its tax forms.

By understanding these three differences between the PPP and ERC, businesses can assess and determine which program better aligns with their specific financial needs and circumstances. Factors such as funding requirements, timing, and associated costs must be considered when deciding which program to pursue.

ERC and PPP Interaction

Indeed, under the CAA (Consolidated Appropriations Act), it is possible for employers who have received a PPP loan to have eligibility for the Employee Retention Credit. However, it is essential to note that different wages must be utilized when applying for both programs. The loan from PPP aims to support businesses in maintaining employees on the payroll. At the same time, the ERC provides a refundable tax credit as an incentive for employers to retain their workforce. As both programs have distinct qualification criteria, it is crucial for business owners to thoroughly review the requirements of each program before applying.

The IRS has established that the PPP payroll costs reported on the loan forgiveness application in 2020 do not have eligibility for ERC. But, there are scenarios in which an employer that received PPP still can receive the Employee Retention Credit:

If a member is receiving a PPP loan but another group member did not apply for an ERC claim,

If the loan from PPP doesn’t cover the qualified wages from the employer.

If the employer utilizes proceeds from the PPP to cover qualifying wages, the forgiven proceeds are not applied to the same qualified wages for ERC.

There are notable distinctions between the PPP and ERC programs. It is crucial to thoroughly evaluate each program individually and comparatively to determine eligibility and identify which program offers the most benefits for your business. Understanding each program’s specific requirements and implications is essential to make informed decisions regarding financial assistance options.

The Application Process

Now that you know the interaction between ERC and PPP, it’s time to consider the application process. Navigating the complexities and updates of the Payroll Protection Program and Employee Retention Credit can leave you with unanswered questions regarding payroll relief. To ensure that your business receives all the entitled payroll assistance for 2020 and 2021, it is advisable to seek guidance from an ERC specialist. These specialists will thoroughly review your business information and determine your eligibility for one or both programs based on the specific criteria.

Once determined eligible, an ERC specialist can assist you in filing quarterly Form 941-X amended payroll returns. This crucial step ensures that you accurately report and claim the applicable credits. By filing amended returns, you provide the IRS with the necessary information to process the credit due to your business. After the IRS processes the credit, you will receive a check from them.

Consulting with an ERC specialist helps ensure that you maximize your payroll assistance and provides expert guidance throughout the application and filing processes. These specialists have in-depth knowledge of the requirements and changes in the PPP and ERC programs, allowing them to provide tailored assistance based on your business’s unique circumstances.

Remember, applying for and navigating these programs can be complex, and it’s important to stay up to date with the latest guidelines and regulations. Seeking professional advice from an ERC specialist can alleviate confusion and provide you with the necessary support to successfully apply for and obtain the payroll relief your business is entitled to.