Employee Retention Credit vs PPP: Can I Claim Both?

March 19, 2024
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By the end of December 2020, a total of 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 presented with the opportunity 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 actually took advantage of this tax credit in the year 2020.

If you happen to be 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 provide an explanation of each of these programs, guide you on the application process, and address the common question of “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 incentivize businesses to retain their staff during challenging times of the COVID pandemic. The purpose of the credit is to provide 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 CARES Act in 2020 and has undergone updates and expansions through subsequent legislation. Initially, it was only available to businesses that didn’t 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 they must have been fully or partially suspended due to government orders. The specific criteria for calculating the decline in gross receipts vary depending on the applicable time 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 has the ability to 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.

It is important for employers to 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 in understanding and maximizing the benefits of the ERC.

Who Has Eligibility?

To have eligibility for Employee Retention Credit (ERC) in 2020, certain 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 the ERC, you can receive a credit of 50% on the very first $10,000 of qualified paid wages to each employee during quarter 2,3, and/or 4 in 2020. This means that the maximum credit per employee, per quarter, is $5,000.

For the 2021 ERC, this criteria must be satisfied:

  • Partial or complete suspension of business operations due to COVID-19 government orders.
  • Gross receipts for quarter 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 apply for the ERC in 2021, you can get 70% of the very first $10,000 in wages that qualify 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 guidance from professionals 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 as a means to provide businesses who needed assistance 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.

The 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. To qualify for loan forgiveness, an application must be submitted prior to the loan maturity date. Failure to apply within the specified timeframe will result in the loan payment no longer being deferred, and repayment will be required by the lender.

When applying for the PPP, you are required to 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, which includes payroll and tax forms, as well as 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. It is recommended to consult with your lender or refer to official sources for the most accurate and up-to-date information when applying for the Payroll Protection Program.

Key Differences Between PPP and ERC

When comparing the ERC and PPP, three main areas of difference come into play: the nature of funding, the funding timing for 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, which 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 in the form of 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

Applying for a PPP loan does not entail any upfront costs for businesses. The only potential expense arises if the loan amount is not fully utilized in accordance with the loan terms.

On the other hand, there’s no cost associated with the ERC itself. 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 the filing of their tax forms.

By understanding these three differences between the PPP and ERC, businesses can assess and determine which program aligns better with their specific financial needs and circumstances. It is essential to consider factors such as funding requirements, timing, and associated costs 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 important to note that different wages must be utilized when submitting an application for both programs. The loan from PPP aims to support businesses in maintaining employees on payroll, while 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 still the Employee Retention Credit:

If a member is receiving a PPP loan, but another group member who did not receive a PPP loan submits an application to claim ERC.

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

If the employer utilizes proceeds from the PPP to cover qualifying wages, but the forgiven proceeds is 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 the specific requirements and implications of each program is essential to make informed decisions regarding financial assistance options.

The Application Process

Now you know the interaction of ERC vs 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 both 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 not only helps ensure that you maximize your payroll assistance but also provides expert guidance throughout the application and filing processes. These specialists have in-depth knowledge of the requirements and changes in both 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.

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