During COVID-19, the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) were made to help companies stay open. If the pandemic has hurt your small business, you might be wondering whether you can use both of these tools. Find out by reading on.
What does the Paycheck Protection Program do?
The CARES Act set up the PPP, which was run by the U.S. Small Business Administration (SBA) and gave loans of up to $10 million to small companies that were having trouble making ends meet because of COVID-19.
You could have gotten a loan for up to 2.5 times your average monthly pay if you were eligible. You can get the loan paid off in full if you fill out an application for loan forgiveness and show that you used the money to pay rent, utilities, payroll costs, and other acceptable expenses.
What is the Credit for Keeping Employees?
The ERC is a tax credit for qualified wages made to employees in 2020 and 2021 that can be refunded. It was made by the CARES Act, and the Internal Revenue Service (IRS) is in charge of it. Its purpose is to encourage companies to keep their workers during the pandemic.
You may be eligible if you had to close down partially because of government orders or if COVID-19 caused a big drop in your quarterly gross sales. You can claim up to $5,000 per employee in 2020 and up to $21,000 per employee in 2021 if you meet certain requirements.
PPP and ERC are not the same.
Even though both the PPP and the ERC were made to help companies that are having trouble financially because of the pandemic, there are a few important differences between the two.
Types of Money
The PPP gives loans that can be paid back. You wouldn’t have to pay the money back if you used it to pay your rent, pay your bills, or do other things that count. If you used some of the loan for things that don’t count, that part won’t be erased. You’ll have to pay it back over either two or five years at a set interest rate of 1%. On the other hand, the ERC is a tax credit that you don’t have to pay back.
Paying for Time
If you were approved for a PPP loan, the money would have been sent to you by direct payment within ten days. The ERC, on the other hand, won’t be sent to you until you file Form 941-X and the IRS looks at your claim. The IRS will take care of your tax credit and give you a check. It can take the IRS anywhere from three to more than six months to handle your credit. We strongly suggest that you file the paperwork with the IRS now to save your place in line.
Cost
Applying for a PPP loan didn’t cost anything. You would only have to pay something back if you didn’t use the loan money for eligible costs and had to pay it back. There is also no charge from the government to get the ERC. It’s a tax credit that you can get by filing an amended payroll tax form for each tax period for which you qualified. If you want a lawyer or tax professional to help you fill out and file your tax forms, you may have to pay a service fee.
Can you get PPP and a credit for keeping employees?
At first, a business that took out a PPP loan could not join the ERC. The Consolidated Appropriations Act of 2021, on the other hand, says that a business that got a PPP loan can also apply for the ERC for the year 2020.
The catch is that you can’t use your wages that make you eligible for PPP loan repayment to figure out how much your ERC is. You’ll need proof that you’re not “double dipping” and using both programs to cover the same pay.
Let’s say you used your PPP money to pay your wages of $50,000 and you want to get your money back. You can’t use those wages that have been forgiven to figure out your ERC in this case.
How to Fill Out a PPP and ERC
You can’t apply for a PPP loan anymore, but you can still apply for an ERC loan. On Form 941-X, you can claim the ERC if you want to. Don’t be afraid to ask an expert for help with your taxes.
How to get the most from the PPP and ERC
You can get the most out of both the PPP and the ERC in a few ways, such as:
-If you included costs other than payroll in your PPP loan forgiveness application, you must show that you spent at least 60% of the total loan on wages. This will make you eligible for a full pardon.
-If you don’t name qualifying non-payroll costs on your application, you’ll have to show that you spent the full amount of the loan on payroll in order to have the whole thing forgiven.
-Explain in detail how the government orders affected your business so that the tax professional you work with can understand. This will help them give you the most money you can get.
-Don’t forget to list the total payroll costs you used for the PPP loan separately from the total payroll costs you list with the ERC. This can help you escape getting turned down for using the same payroll costs for both programs.
-Hire a tax pro instead of doing it yourself. Even though you have to pay, these experts usually know how to use the program much better than you could. Because of this, they can often help you get more money than you would get on your own. They will also help you make sure that you file the credit properly, so that if you get audited, everything will be in order.
Use the PPP and ERC to your advantage
If you applied for PPP, there’s no reason why you shouldn’t apply for ERC. By doing this, you can make up for any money you lost during the pandemic and set up your business for success in the future.
Click here to see if you qualify.