Your Questions & Concerns Addressed for ERC and PPP
When the epidemic hit hard, the ERC (Employee Retention Credit) and PPP (Paycheck Protection Program) were both developed to help small businesses survive. These two initiatives were created to persuade employers to continue paying their employees. Even if they weren’t working within the program’s coverage period.
Companies may claim staff retention credits in the past under certain laws. Additionally, it directs the communication between the PPP and ERC. Learn more about these two programs and how you can retrospectively claim credits for your company by reading the rest of the article.
An ERC Loan Is What?
The Employee Retention Credit was made possible by the CARES Act, also known as the Coronavirus Aid, Relief, and Economic Security Act. Employers are encouraged to continue paying their employees. All thanks to this refundable payroll tax credit. Even if they missed work due to the epidemic during the covered time.
You might be qualified for this credit if you had to close your firm. As a result of a government order. If your gross sales significantly decreased, you may still be eligible for this benefit.
How Does a PPP Loan Work?
To offer forgiven loans, the Paycheck Protection Program (PPP) was first developed.
The PPP loan also aims to keep workers on the payroll, just like the ERC loan does. Employers may rehire laid-off workers who lost earnings as a result of COVID disruptions.
ERC and PPP
The ERC and the PPP used to be mutually exclusive. So, an ERC borrower could not also make a PPP claim.
The exclusivity was revoked retrospectively under the Consolidated Appropriations Act in 2021. This enables a PPP borrower to be eligible for the ERC tax credit as well.
Updates to the Consolidated Appropriations Act
The Consolidated Appropriations Act 2021 amendments are effective from March 13, 2020, through December 31, 2020. Your company may still be eligible for the Employee Retention Credit even if it obtained a PPP loan.
This only applies to wages that weren’t paid with money from the PPP portion that was forgiven. Group healthcare costs, according to the CAA update, are considered qualified earnings. Even if no additional compensation is given to your workers.
Updates on Employee Retention Credit
The update for the per-employee Employee Retention Credit rate went from 50% to 70%. In 2021, the maximum compensation per employee was raised from $10,000 annually to $10,000 quarterly.
Your eligibility is determined by gross receipts that are less than 80% more than those of the same quarter in 2019. This means that you could claim the ERC credit if your gross receipts decreased by more than 20% in 2021.
Regards For ERC and PPP
There are certain questions surrounding applying for this credit before PPP loan forgiveness. In general, before the Consolidated Appropriations Act was passed, the majority of borrowers requested forgiveness for the initial round of PPP loans.
Those who did this had their Paycheck Protection Program debt forgiveness wage amounts deducted from their 2020 ERC qualifying wages. The Employee Retention Credit was left with the unpaid salary.
In 2021, the majority of enterprises finished their PPP second-draw coverage period by the end of the third quarter. But for the second quarter, eligible businesses could submit modified 941-X forms for the Employee Retention Credit.
Concerns About PPP Loan Forgiveness
There is a problem in applying for the ERC loan. Even before getting the PPP debt canceled. For illustration, suppose you received your $ 800,000-second draw PPP loan on January 1. And earned $480,000 in salary in Q1 and Q2.
This sum will cover the PPP loan when you request loan forgiveness. However, if you file for the ERC first and $240,000 every quarter ($480,000 for quarters one and two) was deemed eligible for ERC, you would only have $320,000 in earnings left over for the PPP forgiveness.
The payroll must account for at least 60% of the expenses. Even if you can try to maximize your non-payroll costs for the Paycheck Protection Program debt forgiveness. To fully qualify for PPP forgiveness, the business owner in our case above would have had to declare $480,000. But they do not.
How to Increase ERC
Having a solid plan in place to minimize any surprises when you go to file for the Paycheck Protection Program 2 debt forgiveness is the best approach to optimize the ERC. You could keep track of qualified non-payroll costs, for instance.
Even though a business owner can only deduct around 40% of the loan amount for non-payroll expenses, doing so can help you free up money. You can do this for employee retention credit-eligible wages. The use of additional non-payroll expenses is permitted for those who filed for their PPP 1 loan cancellation in the middle of 2020.
ERC Qualification Review
Your eligibility for the Employee Retention Credit could expire in any quarter of 2021. It all depends on how you completed the requirements.
You can concentrate your wages for your ERC in Q1 and Q2. You can do this if, for instance, your covered period for the PPP second-draw extends into the third quarter but you do not anticipate qualifying for the ERC in that quarter. It’s possible to earn complete loan forgiveness by doing this.
Make the Best Possible Plan For You
Both the ERC and PPP loans were developed to assist business owners in maintaining their payroll.
It also gave them the money they needed to keep the company running. If you want to find out more about your ERC loan and your alternatives, get in touch with Your Part Time Accountant right now.