During the Covid-19 crisis, many businesses were forced to shut down, which created a massive upswing in unemployment benefits being drawn for workers and companies losing revenue. To help the economy recover and keep businesses alive during this crisis, the government created relief act programs that would provide some financial backing to businesses. Most of which they wouldn’t have to pay back. Two programs are the PPP (Paycheck Protection Program) Loan Forgiveness and the ERC (Employee Retention Tax Credit).
As a small business owner, understanding your options to avoid permanent closure during the pandemic is crucial. This article will cover what exactly the ERC and PPP Forgiveness programs are, what they entail, and who qualifies. We’ll also touch on the first stages of applying for both programs.
What is the Employee Retention Tax Credit (ERC)?
The ERC was created under the Cares Act (and then later extended under the Consolidated Appropriations Act) to help buffer the effects of a hard-hit economy and help businesses stay afloat during the Covid-19 pandemic. It essentially helped keep employees on the payroll, even though they could not work during the shutdown.
According to IRS.gov, the refundable tax credit is 70% of up to $10,000 in wages per quarter, per employee, paid by an eligible employer whose business has been financially impacted by COVID-19. In other words, depending upon eligibility, the ERC allows businesses to receive a tax credit of up to $28,000 per employee, per year for the calendar year 2021.
What is PPP Forgiveness?
Like the ERC, the Paycheck Protection Program (PPP) program is there to help organizations cover payroll expenses during the Covid-19 crisis. However, instead of a tax credit, the Paycheck Protection Program comes in the form of a forgivable loan. The eligibility requirements for PPP forgiveness are that funds must be used on qualifying payroll costs, rent, utilities, and business mortgage payments after the 8 to 24 weeks disbursement period.
Once all funds have been spent, businesses can apply for forgiveness. However, if the borrower does not fill out a PPP loan forgiveness application within ten months of the last coverage date, the SBA will no longer defer PPP loans, and the borrower will be responsible for making payments.
What is the Difference Between ERC and PPP Forgiveness?
While both the ERC and PPP forgiveness are intended to help employers retain employees, the means by which they do so are different. Most significantly, the ERC is a tax credit, while the PPP delivers coronavirus aid via a forgivable loan.
Can I Apply for Both the ERC and PPP Forgiveness?
The short answer is yes; you can apply for the Employee Retention Tax Credit and the Payroll Protection Program forgiveness loan simultaneously. Initially, under the original CARES Act, the ERC was unavailable to business owners who chose to participate in PPP forgiveness. However, Congress updated the law to allow businesses to participate in both programs. The key here is that companies cannot claim the ERC using the same wages they used to qualify for PPP. Because neither program allows organizations to claim 100% of an employee’s compensation, this allows for some wiggle room. Employers can decide which wages they wish to claim with which program.
Additional Changes to the CARES Act
The CARES Act initially only allowed employers to claim 50% of eligible wages. Since The Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted in the fourth quarter of last year, the credit percentage has increased from 50% to 70%. The original CARES Act also capped the qualifying wages to be claimed at $10,000 per employee for all quarters. Now, organizations can claim $10,000 per employee per quarter through June of 2021, for a total of up to $14,000 per employee.
What are the Qualifications for ERC?
To qualify for the ERC, an employer had to be in business during 2020 or 2021. They must also meet one of two requirements:
- The business was affected by the mandated nationwide shutdown. Their operations were either suspended fully or partially due to the orders to limit travel, group meetings, and commerce.
- The business experienced “a decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).”
As noted above, you can still benefit from the ERC even if you utilized the PPP, though “double-dipping” is not allowed. You will be required to use qualified wages that were not already used for the Payroll Protection Program.
What are Qualified Wages?
To claim wages for the ERC, they must be considered qualified wages. These are wages that employers give their employees as payment for hours worked and include taxable benefits. They will also include group health plan expenses (even those provided by the employer and pre-tax contributions). The number of qualified wages will be determined by how many full-time employees the employer had during the year.
For employers with more than 100 employees, these will be wages given for any work typically done and do not include workers providing services due to the current qualifying hardship. These wages also must not exceed what the employee would usually make during the 30 days immediately preceding the period of economic hardship.
For smaller employers with less than 100 employees, qualifying wages will be wages given for all employees, even if they’re providing services.
What Wages Don’t Qualify for ERC?
There are a few limitations when it comes to qualifying for ERC. Any wage that does not pertain to an employee working is unqualified. For instance: salaries paid out to someone on the Family Medical Leave Act and any sick or family leave an employee will use to determine tax credits under the Families First Coronavirus Response Act. Another limitation is that any wages claimed for the PPP Forgiveness loan are not qualified to receive the ERC.
How Does a Business Claim the ERC?
There are a few ways to claim the ERC on qualified wages. The first is that, as the employer responsible for payroll, you can reduce the employment tax deposits you would otherwise be required to make.
The second is that for any employer with less than 500 employees in 2019, you can file for an advance refund of the anticipated credit.
The third way to claim the ERC is to request a refund on your quarterly federal employment tax return (Form 941) for any credit not previously given.
What are the Qualifications for PPP Loan Forgiveness?
The PPP loan program officially ended on May 31, 2021. Those who participated, however, may still qualify for the loan forgiveness program. To qualify, the borrower must request forgiveness within ten months after the last day of the covered period. Regardless of whether you utilized the first or the second draw on the PPP loan, so long as you request forgiveness within that time period, you can qualify if you meet the following requirements:
- Employee and compensation levels have been maintained
- The employer spent the loan on eligible expenses and payroll
- And at least 60% of proceeds went to payroll
How Does a Business Apply for the Payment Protection Program Loan Forgiveness?
Once all loan proceeds have been used, a business can apply for PPP loan forgiveness. The first step to applying is to identify if your lender is participating directly through the SBA. This knowledge will help you determine if you need to apply through your lender or the SBA. You can find the list of participating lenders here.
If your lender is participating, you will need to apply directly through the SBA portal. If your lender is not participating, you will need to apply with them.
The second step to applying is compiling your paperwork, such as proof of payroll paid during the covered period and evidence of non-payroll qualified expenses paid during the same time.
Then you will need to submit the application through either SBA or your lender and monitor your application for forgiveness. As the business owner, you have a right to contest any unfavorable decisions, so be sure to stay on top of the actual outcome.
How to Maximize Both Benefits
You’ll want to consider a few items when trying to maximize the PPP loan forgiveness and ERC together. One thing to consider when filing for PPP loan forgiveness is if you listed non-payroll costs in your forgiveness application, you still need to show that you used a minimum of 60% of the total loan for payroll in order to be eligible for full forgiveness. If you don’t list eligible non-payroll costs (not all non-payroll costs are eligible for PPP forgiveness) on the application, then the minimum amount used for payroll needed to be 100% of the loan amount. So, make sure you are very clear on the application about how you used the funding. That way, you can help ensure you receive the maximum amount of forgiveness that your business is eligible for.
This means that you will need to separate the total payroll costs you used for the PPP loan from the total payroll costs you list with the ERC. That way, you don’t accidentally use the same payroll costs for both, which could lead to a denial.
You’ll also want to weigh your options and choose wisely between using the eight-week or 24 week period when claiming. By analyzing both options and digging into your payroll costs separately, you can maximize both benefits.
To recap what we just discussed, with the new changes to the CARES Act, congress has allowed those organizations that applied for a PPP loan to claim the ERC tax credit. That change will let you get the necessary help for your business if it was affected by the Covid-19 crisis. Those who have qualified for PPP can also start applying for the loan forgiveness program. Unfortunately, if the SBA or your lender doesn’t receive the forgiveness application within ten months of the last day of the covered period. You, as the business owner, will be responsible for arranging payments.
Applying for the maximum benefit allowed for both programs can be a smart move. 2020 was a crazy year, and 2021 hasn’t been much better for many small businesses. The purpose of the ERC and the PPP is to both help you recover and to provide for your employees so that our economy can come back stronger than ever.