The ERC (Employee Retention Credit) and PPP (Paycheck Protection Program) were both created to keep small businesses afloat when the pandemic hit hard. These two programs were designed to encourage employers to keep their employees on payroll, even if they were not working during the covered period.
Certain legislature allows companies to retroactively claim employee retention credits. It also provides guidance on the interactions between the ERC and PPP. Continue reading this ERC loan guide below to learn more about these two programs and how you can retroactively claim credits for your business.
Understanding the Employee Retention Credit (ERC)
What Is an ERC Loan?
The CARES Act, short for Coronavirus Aid, Relief, and Economic Security Act, authorized the Employee Retention Credit. This refundable payroll tax credit encourages employers to keep employees on the payroll. Even if they weren’t working during the covered period due to the pandemic.
If you had to close your business due to the government order, you may be eligible for this credit. You also can claim this credit if you had a significant decline in gross receipts.
- The credit amount is up to 70% of qualified wages, allowing you to recover a substantial portion of your payroll costs.
- Eligible employers can claim the credit against their payroll taxes, and any excess can be refunded.
- It applies to both large corporations and small businesses, making it a valuable resource for various industries.
3 Advantages of ERC
- Financial Boost: By claiming the ERC, your business gains access to a considerable tax credit, injecting much-needed capital into your operations.
- Employee Retention: Retaining your workforce is essential for maintaining productivity and ensuring a smooth transition into the recovery phase.
- Competitive Edge: Companies that take advantage of the ERC can reinvest their savings into innovation, marketing, and expansion, gaining a competitive edge over their peers.
Qualifying for ERC
How to Apply for ERC
Understanding the Paycheck Protection Program (PPP)
What Is the PPP Loan?
The Paycheck Protection Program (PPP), was initially created to provide forgivable loans. Like the ERC loan, the PPP loan intends to keep employees on the payroll. Employers could rehire laid-off workers that lost wages to disruptions caused by COVID.
Key points about PPP:
- The loan amount is calculated based on your payroll costs, making it easier to secure funds that align with your business needs.
- PPP loans can be fully or partially forgiven if you use the funds for eligible expenses, such as payroll, rent, utilities, and mortgage interest.
3 Advantages of PPP
- Financial Security: PPP loans provide a safety net during economic downturns, allowing you to focus on long-term goals without constant financial worry.
- Retain Talent: By utilizing PPP funds to retain your employees, you can build a loyal and skilled workforce that drives your business forward.
- Operational Flexibility: The forgivable nature of PPP loans gives you the flexibility to allocate resources strategically, adapting to changing market conditions.
Qualifying for PPP
How to Apply for PPP
ERC and PPP
Originally the ERC and the PPP (paycheck protection program) were exclusive, meaning that an ERC borrower could not also claim the ERC. The Consolidated Appropriations Act 2021, retroactively undid the exclusivity. This allows a PPP borrower the ability also to claim the ERC tax credit.
Consolidated Appropriations Act Updates
Changes made to the Consolidated Appropriations Act 2021 apply to the period from Mar 13, 2020, to Dec 31, 2020. If your business received a PPP loan you might still qualify for the Employee Retention Credit. This is only for wages not paid with funds from the forgiven part of your PPP. The CAA update also states group healthcare expenses are qualified wages even if no other wages are paid to your employees.
Employee Retention Credit Updates
The update for the Employee Retention Credit rate per employee changed from 50% to 70%. The per-employee wage limit increased from $10,000 annually to $10,000 quarterly in 2021.
Your eligibility is based on gross receipts of less than 80% compared to the same quarter in the year 2019. This means that if your gross receipts declined over 20% in 2021, you could take the ERC credit.
ERC and PPP Concerns
There are a few concerns circling around filing for this credit before PPP loan forgiveness. In general, most people filed for the forgiveness for the first round of PPP loans before the Consolidated Appropriations Act passed.
For those who did this, their wage amounts reported for the Paycheck Protection Program loan forgiveness were excluded from those ERC eligible wages in 2020. The remaining wages were left over for the Employee Retention Credit.
Most businesses concluded their PPP second-draw covered period towards the end of the 3rd quarter in 2021. However, qualifying companies were able to file amended 941X forms for the Employee Retention Credit for the second quarter.
PPP Loan Forgiveness Concerns
There is an issue in filing for the ERC loan before receiving forgiveness for the PPP. For example, let’s say you received your second draw PPP loan of $800,000 on the first of January and had $480,000 in wages in Q1 and Q2.
This amount is enough to cover the PPP loan when you apply for forgiveness. However, if $240,000 each quarter ($480,000 for quarters one and two) was considered eligible for ERC, and you file for the ERC first, you will only have $320,000 remaining in wages for the PPP forgiveness.
Although you could look into maximizing your non-payroll expenses for the Paycheck Protection Program loan forgiveness, the payroll must take up at least sixty percent of the expenses. So in our above example, the business owner would need to report $480,000 for complete PPP forgiveness, but they do not.
How to Maximize the ERC
The best way to maximize the ERC is to have a proper plan in place to reduce any surprises when you go to file for the Paycheck Protection Program 2 loan forgiveness. For example, you can track eligible non-payroll expenses.
While a business owner can only report approximately forty percent of the loan amount for non-payroll expenses, this can help free up wages you can use for the Employee Retention Credit. Those who filed in mid-2020 for their PPP 1 loan forgiveness can use additional non-payroll expenses such as supplier costs, software expenditures, and worker protection expenses.
Review ERC Qualification
Depending on the method of how you qualify for the Employee Retention Credit, your qualification may end in any quarter in 2021. For example, if your covered period for the PPP second-draw goes into the 3rd quarter, but you don’t expect to qualify for the ERC in Q3, then you can concentrate wages for your ERC in Q1 and Q2. When you do this, it allows you to receive full loan forgiveness.
Create the Right Strategy for You
The ERC and PPP loans were both created to help business owners keep their employees on payroll. It also provided them with the funds needed to keep the business afloat. Getting your ERC wages paid for in 2021 is easy, but you can use a few different strategies depending on what works best for you and your situation. Contact us now if you want to learn more about your ERC loan and your available options.