PPP Loans vs. Employee Retention Credits

employee retention credits
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As of December 2020, there were 11,475,003 Paycheck Protection Program (PPP) loans, with the average loan being $69,087. 

In addition to the PPP, businesses have the opportunity to take advantage of employee retention credits. This is a special credit for helping businesses maintain workers during COVID-19. Surprisingly, only eight percent of business owners took advantage of this tax credit in 2020.

If you are not familiar with these programs for assisting businesses suffering a loss during the pandemic, keep reading. We are going to explain what each of these programs is, how to apply, and answer “Can I get both PPP and Employee Retention Credit?”

What Are Employee Retention Credits?

The Employee Retention Tax Credit (ERTC) provides assistance to employers whose business was either partially or fully closed due to government COVID-19 orders in 2020. If that closure results in a loss of gross receipts for any quarter of 2020 they may qualify for this tax credit.

The 2020 gross receipts must be less than 50% of company receipts for the same quarter in 2019. Those qualifying are eligible for a fully refundable Employee Retention Credit (ERC).

This credit applies to wages paid in Quarters 2 (Q2), Q3, and Q4 in 2020. At the time the ERC was enacted, employers participating in the Payroll Protection Program (PPP) were ineligible.

The Consolidated Appropriations Act of 2021 extends and enhances the program by providing retroactive applicability. It also expands the program into Q1 and Q2 of 2021. Another change is making recipients of PPP loans eligible for ERC

The American Rescue Plan Act went even further, by making ERC available for all four quarters of 2021. It changes the applicable credit so that in the second half of the year credit is against Medicare instead of Social Security. The Act also adds eligibility for recovery startup businesses.

Even though the program expired, employers can file retroactively for this credit. Using a three-year look-back period you may amend your quarterly tax form, accounting for the ERC credit you did not take during the active program period.

Eligible Employer

To qualify for ERC in 2020 you must meet the requirements of an eligible employer:

  • Have operations suspended partially or fully due to the COVID-19 government order
  • Gross receipts for any 2020 quarter at less than 50% of the same quarter in 2019

If you are eligible and apply for ERC, you will receive a credit of 50% of the first $10,000 you pay in qualified wages for each employee in Q2, Q3, and/or Q4 of 2020. This means the maximum allowable under this program per employee is $5,000 per quarter.

To qualify for ERC in 2021 you must meet the following requirements:

  • Have operations suspended partially or fully due to the COVID-19 government order
  • Gross receipts for any 2021 quarter at less than 80% of the same quarter of 2019

If you are eligible and apply for ERC, you will receive 70% of the first $10,000 you pay in qualified wages for each employee during each of the four quarters of 2021. The maximum ERC for each quarter is $7,000 per employee, and the original maximum total ERC per employee for the year was $28,000.

The fourth quarter of 2021 was later eliminated, reducing the full 2021 quarter down to a total of $21,000. There are certain circumstances where you may be able to recover Q4 ERC.

What Is the Payroll Protection Program?

The Payroll Protection Program is established by the CARES Act. It provides small businesses with eight weeks of cash-flow assistance. This is accomplished with 100% federally guaranteed loans to businesses that maintain employees on payroll during the COVID-19 pandemic.

The loan is completely forgivable as long as the business uses funds for payroll costs, payments on a business mortgage, rent, or utilities. An application for forgiveness must be filed before the loan maturity date. If you do not apply within the allowable time period, your payment is no longer deferred and must be repaid to the lender.

To apply for PPP you must complete either SBA form 3508, 3508EZ, 3508S, or another equivalent form your lender uses. You will need to submit documentation with your application including payroll and tax forms, plus documents showing business expenses.

Differences Between PPP and ERC?

The difference between the Payroll Protection Program and Employee Retention Credits covers three main areas—the type of funding, when the business receives funding, and the cost of the program.

Types of Funding

The PPP provides a business with a forgivable loan. If they comply with the terms of the loan, which includes spending the funds on payroll or rent, the loan doesn’t need to be repaid.

The ERC is a tax credit. It is payable to the business via check from the IRS and does not need to be repaid.

When Business Receives Funding

With the PPP, the business receives the funds by direct deposit into their bank account. This generally happens within a week of loan approval.

The ERC is a credit the business receives when filing its quarterly Form 941. The credit is received against payroll taxes they collect from employees when processing payroll.

Cost Comparison

There is no up-front cost to a business applying for a PPP loan. The only cost happens if you don’t fully spend the loan according to the loan terms.

There is no cost for ERC. It is a deduction you take in completing your quarterly tax return. The only fee is if you pay a service for filing your tax forms.

Can You Get Employee Retention Credit and PPP?

The Consolidated Appropriations Act makes it possible for an employer receiving a PPP loan to be eligible for ERC. Different wages must be used when applying for each program.

The IRS establishes that the payroll costs an employer reports on a PPP application for forgiveness in 2020 are not eligible for ERC. For an employer receiving PPP, the Employee Retention Credit is allowable if:

  • A controlled group member is receiving PPP, but another member of the group not receiving PPP applies to claim ERC
  • The PPP loan is not providing 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

There are distinguishing factors between the PPP and ERC. You need to look at each program both individually and comparatively to determine eligibility and which program most benefits your business.

How to Apply for PPP and ERC

Due to the numerous updates and the differences between the two programs, you may still have unanswered questions about obtaining payroll relief.

To make sure you receive all business payroll assistance your business is entitled to for 2020 and 2021, consult with a specialist at ERC Today. They will review your business information and determine eligibility for one or both programs.

If eligible, they can help you file quarterly Form 941-X amended payroll returns. After filing amended returns, the IRS processes the credit due and sends you a check.

Get Assistance at ERC Today

Don’t miss out on the opportunity to receive payroll assistance. The funds you receive from Employee Retention Credits or the Payroll Protection Program may help your business succeed in the coming years.

Contact ERC Today to schedule a review of your business.

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