Toward the end of 2020, 11,475,003 PPP loans were outstanding, with the approximate debt amounting to $69,087 per person. In addition to the Payroll Protection Program, employers can benefit from ERC, which are tax-deductible—specific credits designed to help companies keep employees on the job during the COVID pandemic. However, surprisingly, just 8% of company owners used this tax benefit in 2021.
Continue reading if you are unfamiliar with the government initiatives and incentives available to aid companies that have suffered losses due to the COVID-19 pandemic. Below, we’ll cover what ERC and PPP are, how to apply for each of them, and whether or not you can obtain both simultaneously.
Employee Retention Credits (ERC)
The Infrastructure Investment and Jobs Act offers support to individuals whose businesses were either partly or entirely affected due to COVID orders issued by the federal government beginning in 2020. They might qualify for this tax credit if their closure decreased gross revenues for 2020. The company’s gross revenues for the first quarter of 2020 must be less than 50% of the company’s gross receipts for the same quarter in 2019.
This entirely refundable ERC is available to those who qualify and applies to salaries earned in the second, third, and fourth quarters of 2020. Until the ERC was passed, employers who participated in the PPP could not participate in the program. Due to the provision of retroactive application in the Consolidated Appropriations Act (CAA), the government extended the program through the first and second quarters of 2021.
Another change is that borrowers of PPP loans will now be eligible for ERC benefits. According to the American Rescue Plan Act, ERC will be accessible for all four quarters of 2021. It alters the applicable credit such that, during the second half of the year, the credit will be applied to Medicare rather than Social Security contributions. In addition, the Act expands the eligibility of recovery starting firms.
Even though ERC has been terminated, employers may still apply for this credit retrospectively. If you have a three-year look-back record, you may be able to amend your quarterly tax return to account for the ERC credit that you did not claim when the program was in full swing.
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Eligibility Criteria for Employee Retention Tax Credit
A qualified employer must meet the following condition to be eligible for ERC in 2020: gross revenues for any one quarter in 2020 should be less than half of the same quarter in the previous year. If you meet the criteria, submit an ERC application to get a credit equal to 50% of the first $10,000 in qualifying wages paid to each employee during the second, third, and fourth quarters of 2020.
This implies that the maximum amount of money earned through this scheme is $5,000 every quarter per employee. On the other hand, ERC eligibility for 2021 will be determined by your ability to achieve the following requirements:
- Activities must be halted in part or whole due to the government order during the COVID-19 pandemic
- Gross revenues for any quarter in 2021 should be less than 80 percent of the comparable quarter in 2019.
Consider the following scenario: you are eligible and submit an ERC application. In such an event, you will get 70% of the first $10,000 in qualifying wages paid to each employee during Q1-Q4 of 2021. Aside from that, the ERC per employee for each quarter is $7,000 max; however, ERC per employee was $28,000 annually at the time of implementation.
Payroll Protection Program (PPP)
The CARES Act provides for establishing the Payroll Protection Program (PPP). It gives small companies cash-flow help for eight weeks, allowing businesses that kept staff on the payroll during the COVID-19 to benefit from 100 percent government-guaranteed loans.
The firm forgave the loan because the funds were used for payroll expenditures, mortgage, utilities, or rent. An application for debt forgiveness must be submitted before the loan’s maturity date. If you do not submit your application within the allotted period, your PPP payment will no longer be deferred and repaid to the provider.
It all starts with submitting SBA Form 3508, 3508EZ, 3508S, or any comparable form that your lender employs to be considered for PPP financing. You will be required to provide supporting evidence with your application, such as tax forms, payrolls, and records demonstrating your business costs.
PPP and ERC – The Difference
Payroll Protection Program (PPC) and Employee Retention Credits (ERC) vary in three significant ways: the type of financing provided, when the firm gets cash, and the program’s cost. The differences between the two programs are as follows:
- Under the PPP, a forgiving loan is given to a company, providing that they adhere to the loan conditions, including using the cash for rent or payroll—the loan does not have to be returned to the bank. The ERC is in the form of a tax credit. It is payable to the firm from the Internal Revenue Service and does not need to be repaid.
- The money is sent to the employer via direct deposit into their bank account when using the PPP, usually within a week of approval. However, ERC is a credit that the employer gets after submitting Form 941 to the IRS. The credit is applied to the payroll taxes collected from workers when they process payroll for the company.
- A firm that applies for the Payroll Protection Program incurs no up-front fees. The only cost incurred is if the company does not spend the loan in full according to the loan conditions. The same is the case with ERC; the company claims a tax deduction when filing quarterly tax returns and will only be charged for the specialist service to file tax returns.
Can You Get Employee Retention Credit and PPP, Simultaneously?
Following the Consolidated Appropriations Act, an employer that receives a PPP loan may be qualified to get ERC benefits; however, different earnings set must be utilized. Specifically, the IRS has determined that payroll expenditures reported by a business for forgiveness in 2020 are not eligible for ERC relief. The ERC Tax Credit is allowed only if the following conditions are met:
- An ERC claim was made by a member of a group that doesn’t get PPP.
- The PPP loan does not cover the cost of the employer’s qualified wages.
- When an employer receives qualified wages from a forgiven loan (the forgiveness does not apply to the same earnings as the qualifying ERC wages).
There are several significant differences between the Employee Retention Credit and Payroll Protection Program. You must examine each program individually and compare it to the others to determine eligibility and which program will be the most beneficial to your company.
How to Apply for Employee Retention Credit and PPP
Due to many changes and the distinctions between the two programs, you may still have questions about how to get payroll relief. Check with an ERC expert to ensure you get all the help your business needs for 2020 and 2021.
They will look at your company information and see if you qualify for one or both. Then, if you are eligible, they can help you file quarterly Form 941-X. Finally, once everything is sorted, the IRS sends you a check.
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The Final Cut
According to the Consolidated Appropriations Act of 2021, your business can now benefit from loan forgiveness under the PPP while also remaining eligible for the ERC. This is provided you do not use the same earnings to determine your eligibility for both programs. However, to maximize the overall advantage while avoiding “double-dipping,” you must develop a carefully calculated approach that considers your company’s specific requirements and circumstances.
So what are you waiting for? Don’t let this chance to obtain payroll aid pass you by. In the following years, the incentives you get through Payroll Protection Program and Employee Retention Credits may provide a breakthrough for your company’s growth. Join hands with a competent firm like Skycutter Solutions to determine if your company qualifies for ERC and PPP in 2022.