The Advantages of Employee Retention Credit Versus PPP Loans

Ppp Loan Or Employee Retention Credit

It’s notable that your business may be eligible to receive ERC even if it’s participated in the Paycheck Protection Program. The consolidated appropriations act of 2021 was updated to permit businesses to benefit from both programs. In addition, the IRS may have changed the refund amount once it got time to process the amended Form 941. To ensure that you correctly claim the right amount of deductions, you may want to consider having someone take a second look at your returns and your amended form before submitting again for the other tax year you didn’t claim. You simply claim the ERTC tax credit like you would any other tax credit – by asserting to the IRS that you can legally claim the credit. The refundable credit amount increased from 50% of qualifying wages in 2020 to 70% in 2021. Businesses who applied for and received PPP funds could now also claim ERTC credits.

Ppp Loan Or Employee Retention Credit

If you are unsure what method to use to calculate your full-time employee’s eligibility, be sure to reach out to a tax attorney or other tax professional to help you. Under the look-back measure method, you can determine if you have a full-time employee by examining their employee’s stability period. The stability period is based upon the hours of service the employee provided in the preceding period. Your Bookkeeper should certainly have access to all the information that is needed for an accurate calculation of your legal ERTC claim.

What Information Do I Need To Determine ERC Qualification?

The Payroll Services that we’ve worked with so far are happy to provide the payroll registers that we need to perform the allocations. And they are happy to file theAmended Form 941-Xwith the IRS on our client’s behalf. On March 11, 2021, The American Rescue Plan Act of 2021 was signed into law and included many modifications and expansions to existing elements of previous stimulus programs.

However, those other costs now may play a big role in receiving the ERC benefit. For the forgiveness calculations, analyzing the ratio of payroll and nonpayroll costs is a critical step, especially with the expansion of additional categories of qualified non-payroll expenses. If sufficient nonpayroll costs are available, limiting payroll costs to the 60% threshold required for full forgiveness may allow the remaining payroll to be eligible for the ERC-provided relief.

It’s important to note that the PPP loan is based on 2.5 months of payroll wages and the forgiveness period is based on 5.5 months . So if you do qualify for the ERC, you should have plenty of wages available for the PPP as well as the ERC. In this example, the receipts were not at the 80% threshold in the second quarter so they would qualify in the first quarter and in the second quarter.

The ERC provisions in 2021

While the notice provided many needed answers, there are still many questions. Carefully consider and plan for potential impacts before you file for PPP forgiveness or claim any payroll credits. Another common area of ERC confusion is surrounding what qualifies as a partial suspension of operations. Prior to the notice, the only IRS guidance on this topic was found in the FAQs, which did not provide specific objective tests to determine whether an employer experienced a partial suspension of operations. In this example, the question is whether Employer B is deemed to have made an election not to take into account the entire $250,000 of qualified wages for purposes of the ERC, even though it only needed $200,000 to receive forgiveness.

Ppp Loan Or Employee Retention Credit

Surprisingly, onlyeight percent of business owners took advantage of this tax credit in 2020. The IRS says Employer C is only deemed to have made the election with respect to $130,000 of qualified wages for purposes of ERC. That means Employer C could claim $70,000 as qualified wages for purposes of the ERC. PPP loan proceeds can only be used for eligible expenses (e.g., payroll costs, rent, utilities, etc.). They do not have to be spent during the covered period, but they do have to be spent on eligible expenses prior to the time the PPP 2 funds are disbursed. Originally, you couldn’t obtain both a PPP loan and employee retention credit, which caused many businesses to avoid the credit. You can obtain both a PPP loan and employee retention credit retroactive back to 2020.

Considerations for Claiming PPP Loan Forgiveness and the Employee Retention Credit

Following the CAA’s approval, taxpayers who received a PPP loan in 2020 and qualified for the 2020 ERC complied with all ERC 2020 conditions. A taxpayer must have already spent or acquired the wages necessary to qualify for any applicable ERC at the end of the tax year and, presumably, the required knowledge to calculate the ERC‘s amount reasonably accurately. The wage expense disallowed must be applied in the year to which the ERC claim pertains, not when the ERC claim is submitted or when the funds are received. Did the taxpayer exclude qualifying wages for self-employed individuals, greater-than-50% owners, and “related individuals”?

  • The IRS says Employer B is only deemed to have made the election with respect to $200,000 of qualified wages.
  • This legislature law reversed the rulings set in place by the IRS and allowed reductions to PPP loan forgiveness.
  • Despite being a rather challenging credit, the ERC may be advantageous for many businesses with income tax purposes.
  • Transitioning to telework — If employer previously did not allow telework, or only allowed minimal telework, then some adjustment period is expected and during this period of adjustment the employer is not considered fully or partially suspended.
  • According to one technique, an employer’s “substantial drop in gross earnings” between the quarter for which qualifying is sought and the same quarter in 2019 must have occurred.
  • Employer’s telework capabilities — Whether employer has adequate support to continue operations from another location.

The amount of qualified health plan expenses taken into account in determining the amount of qualified wages generally includes both the employer portion of costs paid and the pre-tax salary reduction portion from employees. One of the best things about the employee retention credit is that it is easy to claim. There is no need to file an application with a bank as with a PPP loan and wait for it to be approved and funded. Instead, employers can immediately claim the credit by reducing by the amount of their employer share of payroll taxes on employee wages. This reduction should be accounted for in the quarterly employment tax return filed by the employer, usually IRS Form 941, Employer’s Quarterly Federal Tax Return. The ERC is a refundable tax credit against certain employee wages and employment taxes if you had a government shutdown or a decline in receipts in 2021 or 2020 when compared to the same quarter in 2019. Eligible wages depend on the number of full-time employees but owner and related-party wages are not eligible for the credit.

How do you claim the retroactive ERC?

However, under the current legislation, a company can apply for the ERC even if it has received PPP assistance and loan forgiveness, as long as the ERC salary was not paid with PPP money. The ERC is a credit given to a company when it files its quarterly Form 941.

This meant that for all your eligible employees, you could only claim $5,000 for the entire year. During the year 2020, if you had more than 100 employees, you were only able to claim the wages paid to employees when they were not working. If you had to close your business partially or entirely due to a local, state, or government order, you qualify for the employee retention credit. If you had to alter how you do business and could not complete those tasks remotely, you qualify as well.

What Is a Qualified Employee?

Did the taxpayer calculate correctly the number of full-time employees in 2019? Recall that an FTE for this purpose is an employee that worked 30 hours/week or 130 Ppp Loan Or Employee Retention Credit hours/month, and that a monthly average for 2019 is required. Recall also that this calculation is different from the full-time equivalent calculation for the PPP.

For many firms, the Employee Retention Credit has been a significant tax incentive in 2020 and 2021. Despite being a rather challenging credit, the ERC may be advantageous for many businesses with income tax purposes. Cost disallowance, which is neither a deduction nor an item of income, is not cleanly covered by these rules.

Government Ordered Closure

The credit is available to eligible employers who experience economic hardship as a result of the pandemic, and who maintain their employees’ salaries at pre-pandemic levels. The credit is worth up to 50% of qualifying wages paid to employees, up to a maximum of $5,000 per employee.

  • Self-employed individuals and businesses without payroll tax liability cannot claim the ERTC.
  • There are several different reputable companies with tax attorneys and other tax professionals that you can reach out to for assistance.
  • They have $40,000 in non-payroll expenditures and $60,000 in payroll charges that are eligible for PPP Loan cancellation.
  • The average number of full time employees in 2019 is used to determine what wages can be included in qualified wages.

This is accomplished with 100% federally guaranteed loans to businesses that maintain employees on payroll during the COVID-19 pandemic. At the time the ERC was enacted, employers participating in the Payroll Protection Program were ineligible.

Cherry Bekaert LLP is a licensed independent CPA firm that provides attest services to its clients, and Cherry Bekaert Advisory LLC and its subsidiary entities provide tax and business advisory services to their clients. Cherry Bekaert Advisory LLC and its subsidiary entities are not licensed CPA firms. The ERC applies to wages paid each quarter, while the PPP applies to periods that may begin in one quarter and end in another quarter. When filing for a refund with a Form 941-X, it will take longer to get a refund check from the government than it would to report a credit that can then begin to be used against 2021 payroll tax liabilities .

Can You Get the Employee Retention Credit if You Got a PPP Loan?

However, you can include other payroll expenses, such as health insurance, retirement contributions, paid sick leave, vacation pay, and severance pay. The loans can be used to cover payroll costs, rent, utilities, and other expenses. The loans are forgivable if the business uses the money to maintain or rehire employees.

Related Employer Aggregation for Purposes of the Retention Credit:

Eligible employers can claim the refundable ERC against applicable employment taxes equal to 70% of the qualified wages the practice pays. Furthermore, if a governmental order causes the customers of a business to stay at home, but the essential business is permitted to continue operations, the essential business is not considered to have a full or partial suspension of operations. In all such instances, however, the employer may still be eligible for the Retention Credit if it experiences a significant decline in gross receipts. The threshold of 100 full-time equivalent employee is increased to 500 FTE employees for the period from January 1, 2021 to June 30, 2021.

The best-laid plans will use a combined ERC and PPP by using just enough wages to get full PPP forgiveness while keeping the balance of wages for the ERC. Event cancellations, seating restrictions, inability to host gatherings, and reduction in operating hours can all qualify a business for the second scenario. The all-events criteria are not deemed satisfied until the economic performance, often when services are rendered or when the property is utilized or given.

The funds can also be used to reimburse the practice for any lost revenues that were attributable to COVID-19. This program is very similar to the Employee Retention Credit and PPP loans where the revenue in the practice is compared by quarter for 2019 and 2020 to determine if there was any decrease in any of those quarters.

The per-employee qualifying wage ceiling was raised from $10,000 per year to $10,000 per quarter. There is currently no information on whether the PPP will be available after May 31, 2021. However, it is possible that the PPP could be extended again or that a similar program could be created in the future. If you are a small business owner https://quickbooks-payroll.org/ or nonprofit leader, it is important to stay up to date on the latest information about the PPP and other financial assistance programs. When the pandemic happened, many businesses had to close down or alter how they did business. Some had to reduce their business hours, whereas others completely closed shop on certain days of the week.

The rules for shuttered venue operators require, among other things, that there be a paid ticket or cover charge to attend with performances marketed through listings in printed or electronic publications, on websites, by mass email or on social media. Most qualify for the safe harbor, which is the third option on the 3508EZ, assuming that the business has been impacted due to federal, state, or local COVID restrictions. Yes, but an entity that first receives a PPP loan will have that loan netted against its SVO Grant. If you have ERC questions or would like to set up an ERC scoping discussion, email us at For PPP loan inquiries, contact John Carpenter at Employers who are qualified for both PPP Loan cancellation and the Employee Retention Credit should strive to take advantage of the PPP Loan forgiveness first. Then, for any other owners, put in or double-check any relevant information. You must provide information to anybody with a 20% or more investment in the firm.

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