After December 2020, more than 11,475,000 loans were obtained through the Paycheck Protection Program, with $69,087 being the average.
On top of the Paycheck Protection Program, the business can also apply for the Employee Retention Credit. The ERC tax credit was designed to help alleviate the business strain felt from a shortage of employees and to ensure they are retained throughout the pandemic. Unexpectedly, 2020 only saw eight percent of eligible companies filing for the Employee Retention Credit.
Suppose you have never heard of the Paycheck Protection Program or the Employee Retention Credit. In that case, it is good to know that they can both provide payroll assistance to any business that has suffered a financial loss during the pandemic. To help create a clearer picture, we will review each program to determine whether both are obtainable.
Table of Contents
What Does the ERC Consist Of?
Known as the ERC, the Employee Retention Credit assists any business that was forced to fully or partially close because of governmental mandate orders. A business can qualify for the credit as long as there was a gross loss of revenue in any yearly quarter beginning in 2020.
Company gross receipts for 2020 need to be below 50% for equal quarters of the previous year. When receipts qualify, the company can apply for as much as they are eligible to receive from the Employee Retention Credit.
The 2020 quarters that are taken into consideration involve Quarters 2, 3, and 4. Since the beginning of the Employee Retention Credit, the companies that had obtained the Paycheck Protection Program loan were not eligible for the ERC.
Under the 2021 Consolidated Appropriations Act, the ERC received multiple enhancements and an extension which allowed many businesses to apply retroactively. The enhancement received allowed the ERC to be claimed for the first two 2021 quarters. Companies that obtained the PPP loan can now apply for the ERC.
When the American Rescue Plan Act was signed, the Employee Retention Credit was available for all 2021 quarters. The credit is changed to reflect the credit stemming from Medicare taxes, not Social Security taxes. The American Rescue Plan Act also makes all recovery startup businesses eligible.
While the ERC is no longer available, retroactive filing for the credit can be accomplished by a company. This retroactive filing can be amended from the previous three-year period and filed using quarterly tax forms. This allows a business to take advantage of the credit now as opposed to the original period of the ERC program.
Determining If You Qualify
To determine company eligibility for 2020, some ERC requirements must be met first. Below are the two main requirements for eligibility:
- Company operations must be fully or partially suspended due to a government mandate involving COVID-19.
- Less than 50% in gross receipts throughout 2020 equal to 2019 quarters.
For example, a 50% credit will be received when $10,000 is paid in wages are qualified for 2020’s Quarter 2, Quarter 3, and Quarter 4, which will be $5,000 for a maximum total of $15,000 for all three quarters.
To obtain the 2021 ERC, the requirements only differ in the percentage of gross receipts for each quarter, which is 70%.
When eligibility is obtained, the ERC will be $7,000, 70% of the qualified $10,000 wages earned by each employee for each 2021 quarter, and with a $28,000 maximum ERC.
Unfortunately, 2021 Q4 was not included in claiming, which resulted in the maximum being reduced to $21,000. However, you may find circumstances where Q4 may be recovered.
What Does The Payroll Protection Program Consist Of?
Under the CARES Act, the Payroll Protection Program was developed to assist businesses with two months' worth of cash flow to help keep businesses moving forward throughout the pandemic by keeping staff on payroll.
Loan forgiveness can be obtained if the business uses the funds to cover payroll and any other associated business costs involving utilities, rent, or mortgage. For forgiveness to be achieved, it must be filed before the date the loan is to mature. If the application is not made before the maturity date, the payment must be made.
Applying for the Payroll Protection Program needs to be submitted using forms 3508, 3508EZ, or the 3508S from the SBA. When filing your form, other documents such as tax and payroll, and expense documents will need to be included.
3 Differences Between the ERC and PPP?
There are three main differences between the Employee Retention Credit and Payroll Protection Program. These areas cover the funding type when funding is received and the program cost.
1. Funding Type
With the Paycheck Protection Program, it is a loan that can be forgiven if used for specific business purposes and terms set by the program.
For the Employee Retention Credit, it is a credit made up from taxes that the IRS then pays with no need for repayment.
2. Funding Timeframe
When the Paycheck Protection Program is approved, the funding is deposited directly into the business’s bank account. A deposit will usually take place within seven days from approval.
The Employee Retention Credit, it is received after filing quarterly taxes using Form 941. The credit is based on taxes taken out of each employee’s payroll.
3. Program Costs
No cost is involved when the Paycheck Protection Program is applied for. A cost will only need to be made if the business does not adhere to the loan terms.
The Employee Retention Credit also has no cost involved because it is based on quarterly taxes filed through the IRS.
Are Both Available to Obtain?
With the recent amendments to the ERC, a company that has obtained PPP can now apply for the Employee Retention Credit. However, determining the amounts received will be decided by the type of wages used. The purpose of the PPP is to help a business retain its staff through a loan, and the ERC helps retainment by providing a tax credit that is refundable after taxes are filed.
To obtain either program’s funds, the business needs to qualify. In order to be sure that qualification takes place, a review of the programs should be done so that all details are known prior to applying to either fund opportunity.
According to IRS rules, the payroll that is used for the PPP application to obtain forgiveness does not make the business ERC eligible. To obtain the ERC while PPP is obtained, the following must take place:
- The loan amount from PPP does not involve qualified wages
- The wages stem from forgiven funds from a PPP, but the wages from the forgiveness are not the same as wages from the ERC.
- Not all group members are obtaining PPP, so those who do not have PPP can apply for ERC.
Both the ERC and PPP have certain factors to understand. You will only understand these if you understand each program and what they both involve regarding the most benefits and eligibility.
How to Allocate Wages Between PPP and ERC?
The wages that qualified you for the PPP cannot be used in determining the ERC tax credit amount. So, you will need to provide documents to the IRS which prove you are not using both the ERC and PPP programs for covering the same employee wages. This ERC and PPP interaction is essentially what it boils down with the IRS.
The Application Process
With many updates occurring among the ERC and PPP, many questions may still need to be answered concerning these great tools for financial relief.
To get the most for your business, contacting a specialist who can help submit your ERC tax form or apply for the PPP is a good idea. All required documents will be reviewed, and eligibility will be determined for either program you are applying for.
Once eligibility is determined, your quarterly 941-X can be filed, which shows the amended payroll. The IRS will then process the form and send the refund credit in the same manner it was filed for.
Contact a Specialist
Obtaining assistance with payroll is a great way to stay ahead in business. So whichever program you wish to have funding come from, you will love that both the Employee Retention Credit and Paycheck Protection Program are an option that is available to you and your business.