Do you know that tale about George Washington and the cherry tree? We hate to break it to you, but it never happened. Unfortunately, myths have a way of getting woven into “truths” that we know and can persist for centuries. When it comes to the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP), myths have been surrounding the two since COVID began. Can you apply for both? Will applying for both cause repercussions? If your gross business receipts didn’t drop, will you still qualify? The deadline has passed – you can’t still apply, can you? It’s too much of a hassle – why bother? In this blog, we’re digging into these myths to uncover the truth behind ERC and PPP and what you can do to help your small business receive thousands in tax credits.
Paycheck Protection Program, or PPP, forgivable loans are backed by the Small Business Administration (SBA). They were created in March 2020 to assist businesses by keeping their workforce employed during the COVID-19 crisis. Small business owners could apply for the first or second draw through an SBA-backed bank or lender, and funds were deposited directly into their bank account if approved. PPP loans could be used for payroll or other operating costs such as rent, mortgage interest, or utilities.
PPP regulations require business owners to spend at least 60 percent on payroll, with the remaining balance available for the following:
- Personal protective equipment (PPE) for employees
- Property damage costs due to public disturbances not covered by insurance
- Worker protection expenditures to be COVID-19 compliant
- Health insurance
Employee Retention Credit (ERC), however, is a fully refundable tax credit filed against W-2 employment taxes. Like the Paycheck Protection Program, it was also created during the COVID-19 pandemic to help small businesses recover from the economic fallout. The ERC was created in 2020 by the Coronavirus Aid, Relief and Economic Security Act (CARES) and is a credit to incentivize small and medium businesses to retain employees during the pandemic. Many companies will argue that the ERC has been their lifeline post-coronavirus outbreak.
Small business employers that had under 500 full-time employees in 2021 are eligible to receive ERC refunds during the calendar quarter when qualifying wages were paid. Your company can receive a credit for each employee for the first $10,000 in wages paid per quarter.
Unlike PPP, ERC funds are filed through the IRS and given as a paper check. As a result, they can be used on any business expense and are not limited solely to expenditures that PPP covers.
So now that you know what ERC and PPP are, let’s get right to it. We’re tackling the five top myths floating around since the Kansas City Chiefs won their second Super Bowl. As a small business owner, we know you’ve got many plates to juggle. That’s why we’re breaking down the essentials with each question. So, skip the hours of searching and get your PPP and ERC questions answered right now.
Myth #1: If You Applied for a PPP Loan, You Aren’t Eligible for ERC
One of the most persistent myths is that if you’ve already applied for a PPP, you’re ineligible to apply for an ERC. But if you’re a small business owner who has struggled to keep the doors open through COVID-19 and is researching available funds, you’re in luck.
Truth: You Can Still Qualify for an ERC Even If You Applied for a PPP Loan
Originally federal law did not allow small businesses to claim the ERC and PPP simultaneously, but the law changed. The Taxpayer Certainty and Disaster Tax Relief Act enables employers who’ve applied for PPP retroactively to apply for ERC for the years 2020 and 2021. According to the IRS website, “An employer that is eligible for the Employee Retention Credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP).” Even businesses that received PPP loans are eligible to claim the ERC, which maximizes the relief funding to help your business move forward.
So how much exactly could you be getting with an ERC? For 2020, up to $5,000 is available for each W2 employee. In 2021, federal law increased rates per employee to $7,000 for Quarters 1, 2, and 3 for a yearly allowance of $21,000 maximum.
There are a few caveats to keep in mind:
- Eligible employers can only claim the ERC on any qualified wages not included in payroll costs from obtaining PPP loan forgiveness
- Any wages that could qualify under ERC or PPP could be applied to either but not both
For instance, an employer who spent all their PPP on payroll expenses would not be able to claim the ERC for the payroll expenses covered by PPP funds. But an employer who only spent 60% of their PPP on payroll and the remaining 40% of funds on utilities could claim the portion of payroll that was paid out-of-pocket and not paid with PPP funds.
Savvy employers may have been able to maximize their PPP for draws one and two, had them forgiven, and then maximized ERC allocations, but if you’re like most small business owners and you’ve already spent 100% of PPP loans on payroll, you may be thinking that it’s a bit too late to claim ERC funds. However, you may still be eligible. There may be specific quarters for which you could claim Employee Retention Credits, and that’s where Stenson Tamaddon can help. Our team of specialists can walk with you each step of the way and unlock your full potential for credit relief.
Myth #2: You Shouldn’t Apply for Both Employee Retention Credit and PPP loans
If you’ve taken the PPP and are on the fence about applying for an ERC, you could be leaving money on the table. In a recent Forbes article, the IRS management projected that up to 80 percent of small and medium businesses were eligible for taking the ERC, but the reality is that far fewer businesses have taken the necessary steps to claim the credit.
Truth: Utilizing Both Economic Relief Programs Could Positively Impact Your Business
While it’s true that small businesses initially were not allowed to claim both the ERC and PPP, they now can. Taking advantage of both programs can give additional economic relief to your small business.
Since you can use the ERC however you see fit for your business, you can alleviate some of the burdens of meeting payroll with PPP funds and doing what you must to keep the doors open by filing for the ERC. By utilizing both economic relief programs, you could positively impact your business. Connect with the Stenson Tamaddon team and we can help you maximize your credit with a focus on compliance. We’re ready and available to serve you.
Myth #3: If Your Business’ Gross Receipts Didn’t Drop 50%, You Won’t Qualify
When the ERC was originally introduced, the program wasn’t benefitting as many businesses as intended. So, in December 2020, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act which made substantial changes to the program such as increasing the maximum credit amount that can be claimed per employee and modifying the definition of qualified wages.
Truth: The Tax Credit Could Also Be Available to Businesses Affected by Partial or Full Suspensions
If your revenues didn’t drop by half, your business could potentially still qualify for the Employee Retention Credit. How? Alongside revenue reductions, ERC is also available to businesses affected by government-ordered partial or complete shutdowns.
For instance, if you own a restaurant and had to change dine-in experiences to take-out due to partial shutdowns, you could be eligible to receive Employee Retention Credits. After all, you couldn’t fill seats inside the restaurant because of government orders. Or suppose your business had to limit customer seating with six-foot regulations, reduce the number of staff to allow for social distancing, increase the time needed to disinfect surfaces or limit hours due to COVID-19. In each case, you could be eligible for up to $26,000 in retroactive ERC credits.
Many businesses were able to tread water during the height of the pandemic, but that doesn’t disqualify them from the Employee Retention Credit. After all, the Employee Retention Tax Credit (ERC) is the government’s way to give back to businesses and essentially reward them for keeping employees on the payroll, even if they were forced not to work for some time.
Was your business partially or fully shut down during the pandemic? Did you have to adjust payroll and procedures in 2020 or 2021? If so, talk with one of our tax credit specialists today to learn more about how you can get the money you deserve.
Myth #4: The Employment Retention Credit Ended. It’s Too Late to Take Advantage
Truth: The Employment Retention Credit is Still Available
While it’s true that the Employee Retention Tax Credit is no longer available for wages paid after the third quarter of 2021, many small business owners may not realize they can still apply for the credit. And in fact, they have three years from their original employment tax filing deadline to claim the credit retroactively. So, if you’re a small business owner with W-2 employees impacted by COVID-19 regulations and shutdowns in 2020 or 2021 you could still claim the credit if you are eligible.
Many business owners may have been dissuaded from applying for ERC and PPP due to shifting regulation changes, but since the rules for claiming both credits were expanded in 2021, some small business owners may still be able to file an amended payroll tax return.
Don’t wait! If you’re ready to take advantage of the Employee Retention Credit, connect with our team of specialists today.
Myth #5: Filing for the Employment Retention Credit Will Be Too Much of a Hassle
Like most things in life, you’re probably asking yourself, “Is it worth it?” When it comes to getting that drive-through coffee remade because they forgot to add an extra sugar, we’d say the answer is probably no.
But when it comes to potentially receiving tens of thousands of dollars back for your business after an incredibly challenging two years, the answer is a resounding yes. If your business has suffered during the pandemic, you have a great chance of eligibility.
Truth: Filing for the Credit Can be Easy
At Stenson Tamaddon, we understand the need to clearly and effectively provide tax solutions for businesses like yours and want to help them receive the available funding they’re eligible for quickly and promptly.
We can determine if you are eligible for ERC, help you fill out a Form 941X based on your employer’s quarterly federal tax return, and even file for an advance payment on your credit. Our job is to maximize the credit you receive and minimize any risks that come with it by utilizing our proprietary technology that prioritizes compliance. It’s safe to say that we are confident in what we do and would be proud to be your ERC partner.
Get the money you deserve. Contact Stenson Tamaddon to start filing for your ERC today.