Maximizing Your Benefits: A Comprehensive Guide to Employee Retention Credits and PPP Loan

Unlock the secrets to leveraging Employee Retention Credits and PPP in your business, maximizing benefits, and turning financial challenges into growth opportunities in this comprehensive guide.

Maximizing Your Benefits: A Comprehensive Guide to Employee Retention Credits and PPP Loan
Photo by Alexander Mils / Unsplash

When navigating the financial landscape amidst challenging times, two key elements stand out for businesses – Employee Retention Credits (ERC) and the Paycheck Protection Program (PPP). The refundable tax credit is a refundable tax credit intended for companies to retain their employees during financial turmoil. In contrast, PPP is a loan to help businesses keep their workforce employed amidst the COVID-19 crisis.

Retention credit and PPP programs, backed by the federal government, are financial relief measures and strategic tools businesses can leverage to sustain, grow, and thrive. Understanding their nuances, eligibility criteria, and optimal utilization strategies can open new financial stability and growth avenues.

Employee Retention Credit (ERC) Explained

The Employee Retention Credit (ERC) is an incentive from the U.S. government to encourage businesses to keep their employees on the payroll, especially during significant disruption or downturn periods. Implemented as part of the CARES Act, Employee Retention Credit affords companies a tax credit for wages paid to employees during turmoil, helping alleviate some financial burdens.

In addition, the Consolidated Appropriations Act signed into law in December 2020, brought significant changes to the ERC. It also included a Disaster Tax Relief Act provision, where ERC can be used for qualified disasters. The CAA also increased the credit percentage from 50% to 70% of qualified wages and raised the limit on per-employee creditable wages from $10,000 per year to $10,000 each quarter.

The eligibility requirements were also broadened to cover businesses that saw a 20% decrease in gross receipts in a particular quarter compared to the same quarter in 2019. By amending the CARES Act, the Consolidated Appropriations Act has made the ERC more accessible and beneficial to businesses navigating the impacts of the pandemic.

This credit is computed based on a percentage of qualified wages paid to employees, including specific health plan expenses. It's important to note that these wages can be for when the employees were providing services or could not work due to the disruption. By reducing the employer's federal payroll tax, the Employee Retention Credit is a valuable lifeline for eligible employers sailing through turbulent economic waters.

Paycheck Protection Program (PPP) Loan Explained

The Paycheck Protection Program (PPP) is a loan initiative established by the U.S. government's Small Business Administration (SBA) and is under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The program aims to provide small enterprises with enough funds to cover up to eight weeks of employment costs, including benefits, effectively supporting enterprises to maintain their workforce during the COVID-19 crisis.

A distinctive feature of the PPP loan is its forgivable nature. The loan may be entirely forgiven if businesses meet specific criteria, primarily using the loan for eligible expenses like payroll, rent, mortgage interest, or utilities. This feature, essentially turning the loan into a grant, provides a significant financial cushion for businesses, helping them weather economic uncertainties while keeping their employees on the payroll.

Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) Loan Key Differences

While retention credit and PPP offer financial relief, their structures, eligibility, and benefits differ significantly. Let's delve deeper into these differences to help you decide which program best suits your business's needs.

Source of Funding

One of the primary differences between the Employee Retention Credit and PPP is their funding source. While ERC is a direct tax credit from the government reducing your federal payroll tax, PPP is a loan granted to businesses, which requires repayment unless forgiven.

Purpose of the Funds

Although both programs aim to support employee retention during times of financial crisis, they differ in the scope of their usage. Employee Retention Credit funds are specifically for covering wages and certain health plan expenses. At the same time, PPP funds can be used for other eligible business expenses like rent, mortgage interest, or utilities.

Forgiveness Terms

PPP loans are unique in their potential to be entirely forgiven, essentially turning into non-taxable grants, provided businesses meet specific criteria. On the contrary, ERC is a tax credit and does not need to be repaid; however, it doesn't offer the additional benefit of potential forgiveness.

Effect on Other Tax Credits

Claiming the ERC affects the calculation of other employment tax credits, like the Work Opportunity Tax Credit (WOTC) and the Family and Medical Leave Credit. PPP, conversely, does not impact the calculation of these other tax credits.

Eligibility Criteria

Lastly, the eligibility criteria for both programs are distinct. ERC is available to all businesses that have faced economic hardship due to COVID-19, regardless of size. In contrast, PPP is primarily geared towards small businesses, with specific criteria for what constitutes a small business.

Who Are Eligible For Employee Retention Tax Credit And PPP Loan Forgiveness?

Choosing who is eligible for the Employee Retention Credit (ERC) and the Paycheck Protection Program loan forgiveness can seem complex, but it's essential for businesses seeking financial relief. In this section, we'll delve into the specific requirements for these programs, providing a roadmap for companies to assess their eligibility.

Employee Retention Tax Credit Eligibility

Below are the eligible for ERC:

Full or Partial Suspension of Operations

To qualify for ERC, your business operations must have been fully or partially halted due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.

Significant Decline in Gross Receipts

Another eligibility criterion for ERC is experiencing a significant decline in gross receipts. This is defined as a quarter in 2020 or 2021 where your gross receipts are less than 50% of what they were for the same quarter in 2019.

Maximum Amount of Qualified Wages

The amount of qualified wages taken into account for each employee is capped at $10,000 per quarter in 2021. For 2020, the cap was $10,000 per year. This includes wages and compensation and a portion of the cost of employer-provided health care.

Prohibition Against Double Benefits

Businesses cannot claim the ERC for wages paid using the PPP loan, constituting a prohibition against double benefits.

PPP Loan Forgiveness Eligibility

Below are the eligible for loan clemency:

Small Business Owners

Owners of small businesses with 500 or fewer workers are eligible for loan forgiveness. All sole proprietorships, independent contractors, and self-employed people fall under this category.

Non-Profit Organizations

Additionally, 501(c)(3) non-profits with 500 personnel or fewer are qualified for the PPP loan forgiveness program.

Veterans Organizations

Veterans organizations classified as 501(c)(19) are also eligible, provided they meet the employee threshold.

Tribal Businesses

Tribal businesses that meet the SBA's size standard are eligible for PPP loan clemency.

Enterprises Under the Accommodation and Food Services Sector

Enterprises under the accommodation and food services sector (NAICS Code 72) can also be eligible for forgiveness with a higher employee threshold—specifically companies with less than 500 employees per physical location.

Faith-Based Organizations

Faith-based organizations that are tax-exempt under the IRS code 501(c)(3) can qualify for loan clemency too. These organizations must follow the same guidelines and employee stipulations as other eligible organizations.

Businesses with NAICS Code Beginning with 72

Businesses having NAICS code beginning with 72 (Accommodation and Food Services), multiple physical locations, and fewer than 500 employees per site are also eligible.

Enterprises that were in Operation before February 15, 2020

Businesses operating before February 15, 2020, and had employees for whom they paid salaries and payroll taxes are eligible for loan forgiveness.

Can Eligible Employers Apply for Employee Retention Credit and Paycheck Protection Program Loan Forgiveness?

While an employer can benefit from both Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) loan forgiveness, it's crucial to note that there are specific guidelines to follow. According to IRS and SBA regulations, it is not permitted to "double-dip," which refers to using the same wages to be eligible for both ERC and loan forgiveness. Consequently, an employer must ensure a distinct separation of the wage costs claimed for these two programs.

A strategic approach can maximize the benefits of both programs. For example, an employer could use the PPP loan to cover allowable expenses such as rent, mortgage interest, or utilities, then claim ERC for the remaining wages not paid with the PPP loan proceeds. This would allow the employer to utilize the PPP loan for its forgivable components and simultaneously claim the ERC for eligible wages.

Ultimately, the possibility of availing both ERC and loan clemency requires careful planning and precise financial management. Employers are encouraged to consult with financial advisors or tax professionals to navigate the complexities of applying for both programs, ensuring compliance with all regulations and maximizing their financial relief.

Things To Consider When Applying For Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) Loan Forgiveness

When applying for Employee Retention Credit (ERC) and PPP loan forgiveness, businesses must consider many factors. These considerations range from understanding the detailed stipulations set by governing bodies to meticulous financial planning and management.

Consider the Timing

Both ERC and PPP have specific time-sensitive guidelines. Ensure understanding of the deadlines for applying, spending the funds (in the case of PPP), and claiming the credit (for ERC).

Understanding the Documentation Required

Proper documentation is vital to a successful application and claiming benefits. Ensure that you maintain accurate records of payroll, health insurance costs, and all other expenses you plan to claim.

Evaluating the Impact on Other Tax Credits

Claiming the ERC or loan forgiveness could impact your eligibility for other federal tax credits. It's essential to understand these interactions to avoid jeopardizing other potential benefits.

Staying Updated on Changes

The ERC and PPP are subject to legislative changes that can alter their terms. Keep informed about any potential updates to maximize your benefit and maintain compliance.

Engaging Professional Advice

Given the complexities involved in these programs, it may be beneficial to seek professional advice. Tax professionals or financial advisors can provide guidance tailored to your circumstances, ensuring you maximize the available financial relief programs.

How To Apply For Employee Retention Credit and PPP Loans?

Embarking on applying for Employee Retention Credit (ERC) and PPP loans can seem daunting, but it becomes significantly more manageable with the proper guidance. The subsequent steps will provide a comprehensive understanding of the application procedures, providing a smooth and efficient path toward securing these crucial financial relief measures.

Steps to Apply for Employee Retention Credit

  1. Determine Eligibility: Verify if your business fulfills the eligibility criteria for ERC. A business qualifies if it has undergone a full or partial shutdown because of governmental order related to COVID-19 or if it can demonstrate a notable decline in gross receipts for a specific quarter.
  2. Compute Qualified Wages: Calculate the total qualified wages for eligible employees. Qualified wages include certain health plan costs and depend on the number of employees and the specific quarter.
  3. Calculate the Credit: Once you've computed the qualified wages, calculate the credit. The rate is 70% of qualified wages for each employee, up to a maximum of $10,000 in wages per employee per quarter.
  4. Claim the Credit: Claim the ERC on your federal employment tax return by reporting total qualified wages and corresponding health insurance costs for each quarter on your employment tax return.
  5. Reduce Deposits: If you're eligible, you can benefit from the ERC by reducing employment tax deposits you would otherwise have to make. This includes withheld taxes, the staff's share of Social Security and Medicare, and the business owner's share of Social Security and Medicare taxes.
  6. Request Advance: If your employment tax deposits need to be increased to cover the credit, you may get an advance from the Internal Revenue Service (IRS) by submitting Form 7200, Advance of Employer Credits Due to COVID-19.

Remember, professional guidance from a tax advisor or accountant is highly beneficial when navigating these steps and the associated complexities of the ERC.

Steps to Apply for PPP Loan Forgiveness

  1. Reviewing Forgiveness Terms: Familiarize yourself with the loan forgiveness terms. The loan will be forgiven if 60% is used for payroll costs, while the remaining 40% is for mortgage interest, rent, and utilities.
  2. Tracking Your Expenses: Keep a thorough record of all qualifying expenses during your covered period. This will be crucial for the forgiveness application process.
  3. Choosing a Covered Period: Decide whether to use the 8-week or 24-week covered period. The covered period starts from the day you receive your PPP loans and is when you must spend the loan on eligible expenses.
  4. Filling Out a Forgiveness Application Form: Fill out a PPP Loan Forgiveness Application Form, either SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S.
  5. Compiling Necessary Documentation: Prepare documents supporting your payroll and non-payroll expenses. Documentation may include bank statements, tax forms, payment receipts, and lease agreements.
  6. Submitting the Forgiveness Application: Submit the completed application form and documentation to your PPP lender. Some lenders may allow online submissions.
  7. Awaiting Decision from Lender: Your lender will review your application and decide within 60 days. If approved, your loan will be fully or partially forgiven.

Expert guidance from a financial advisor or an accountant is quite helpful when negotiating these stages and the complexities of loan forgiveness.

Employee Retention Tax Credit (ERC) and PPP Loan Forgiveness Deadline

Below are the deadlines for ERC and PPP:

Employee Retention Credit Application Deadline

The cut-off for the Employee Retention Credit (ERC) is a crucial date that businesses should mark on their calendars. The deadline is particularly significant as it determines when qualifying businesses can claim the credit. Currently, the ERC is available for qualified wages paid following March 12, 2020, and before January 1, 2022. It's wise to anticipate potential changes in the deadline as legislative amendments may extend or shorten the duration of the ERC.

  • Deadline for 2020 tax year (Q2-Q4)- April 15, 2024
  • Deadline for 2021 tax year (Q1-Q4) - April 15, 2025

PPP Loan Forgiveness Application Deadline

The Paycheck Protection Program loan forgiveness application deadline is another critical milestone for businesses to note. Ten months following the conclusion of your chosen covered term, or between 8 and 24 weeks after obtaining the loan, is the deadline for applying for loan forgiveness.

If businesses apply within this timeframe, PPP loan payments can be forgiven, and the loan must be repaid. It's prudent to regularly check for updates on this deadline, as changes can occur due to new legislative decisions.

The PPP loan program already ended, but businesses can still apply for Employee Retention Credit. You can visit the ERTC Express website to learn more about this program.