For small businesses nationwide, COVID-19 caused significant upheavals in operations. You’re certainly not alone if you were forced to shutter doors for months with mandated government orders. Regardless, over the course of 2020 and 2021, almost all small businesses had to find workable solutions to keep their operations functioning, including limiting customer capacity, fewer employees, adding sanitation crews, and training employees on added pandemic-specific Personal Protective Equipment (PPE).
Three years later, small businesses still feel the pandemic’s ripple effects. From inflation to supply and employee shortages, operations are anything but ordinary. As a result, owners are looking for ways to take some of the financial burdens off. Lately, there’s been a lot of talk about the Employee Retention Credit (ERC) and the Payment Protection Plan (PPP). But you’re probably wondering, “What exactly are the ERC and the PPP?” Or perhaps you’ve already claimed the PPP and are wondering if you’re still eligible for the ERC. In this blog, we’re unpacking what the ERC and PPP are (and what they’re not) and how the ERC can benefit your small business, and how to get your biggest ERC refund.
What the ERC is
In a Snapshot:
- Tax credit backed by the Internal Revenue Service for up to $26k per employee
- Ran from 2020 Quarter One through 2021 Quarter Three*
- Available to retroactively file through 2024 Quarter Three*
- ERC qualifications need to meet one of two requirements
- No requirements for how to spend funds
The Employee Retention Tax Credit, or the ERC, is a refundable payroll tax credit of up to $26k per employee filed against employment taxes. It’s retroactively available to employers of all sizes, including startups and tax-exempt organizations, except for 1) government operations and 2) small businesses with business loans. Small business employers under 500 W2 full-time employees can receive the ERC refund during the fiscal quarter where wages were paid out.
The ERC was first established by the Coronavirus Aid, Relief and Economic Security Act (CARES) in March 2020, during the height of the COVID-19 pandemic. It was created as an incentive to encourage small businesses to keep W2 employees on the payroll. The ERC tax credit is filed through the Internal Revenue Service (IRS) and refunded as a paper check. Therefore, it has no limitations and can be used for any type of business expense.
Small business owners can retroactively file for ERC funds for the following fiscal quarters: 2020 Quarters One through Four and 2021 Quarters One through Three. *As a caveat, startup businesses can also include retroactive filing for 2021 Quarter Four.
What the ERC is Not
Many myths have been circulating online about what the ERC is and is not. In this section, we’re debunking the most common ERC myths.
The ERC is Not:
- A loan that needs to be repaid
- A refund that’s limited to payroll expenditures
- Applicable for small businesses with no W2 full-time employees
- Unattainable for employers who’ve received PPP loan funds
ERC Qualifications to Keep in Mind
To qualify for the ERC tax credit, a small business employer must meet one of two alternative tests per eligible fiscal quarter:
- The small business was fully or partially suspended because of COVID-19 government orders or
- Gross receipts were below 50 percent of the comparative 2019 quarter
Not sure if you qualify? Fill out our simple 10-question survey, and we’ll be in touch with your next steps and an initial estimate of your ERC refund credit.
What the PPP is
In a Snapshot:
- Forgivable loan backed by the Small Business Administration
- Loan amounts max out at 2.5 times average monthly payroll costs
- Ran from 2020 Quarter One through 2021 Quarter Two
- Not available to retroactively apply for, as of May 31, 2021
- Available in two draws: PP1 and PP2
- Requirement to spend funds in pre-allocated business expenses
Payment Protection Program, or PPP, forgivable loans were created the same month as the ERC tax credit to assist businesses by keeping their workforce employed during the pandemic. But the similarities with the ERC tax credit end there.
PPP loans were backed by Small Business Administration (SBA) banks and lenders who deposited the funds into small business accounts for the fiscal quarters from 2020 Quarter One through 2021 Quarter Two. First-time PPP borrowers could apply to borrow up to two and a half times their average monthly payroll costs, up to a maximum of $10 million.
As a result, small business owners could apply for the first (PPP1) or second draw (PPP2) and use most PPP funds for payroll, the highest operating cost of small businesses.
PPP regulations require small business owners to spend at least 60 percent on payroll, with the remaining balance available for the following:
- Health insurance
- Worker protection expenditures
- Property damage costs
What the PPP is Not
The PPP is Not:
- A fully refundable tax credit, like the ERC
- Automatically forgiven
- A refund that can be used for any business expense; Limitations dictate usage
- Available to retroactively apply for, as of May 31, 2021
Why Small Businesses May Benefit More From an ERC Tax Credit
If your small business has weathered COVID-19, you could be eligible for the ERC tax credit of up to $26k per employee. Unlike the PPP loan, when you receive the ERC, you don’t need to apply for loan forgiveness or repay any portion. So all of what you receive, including up to $26k per employee, is there to support your business.
And with year-end inflation numbers expected to hover at about double the pre-pandemic numbers, every bit of extra funding helps with profit margins. In addition, your ERC refund can be used not only for payroll, rent, utilities, and insurance but for any expense attached to running your operations; This is especially helpful with inflation hampering small businesses nationwide.
Additionally, ERC qualifications have broadened; In March 2020, new legislation opened opportunities for countless small businesses to take advantage of the PPP loan and ERC tax credit together; This meant that far more small businesses could secure funding to help cover business expenditures instead of having to choose between the two programs.
Retroactively Claim Your ERC Tax Credit With Confidence
At ERC Tax Experts, we’re a team of dedicated specialists who will interpret highly complex program rules and will be available to answer your questions, including:
- How does the PPP loan factor into the ERC tax credit?
- What are the differences between the 2020 and 2021 ERC tax credit programs, and how does it apply to your small business?
- What are aggregation rules for larger, multi-state employers, and how do I interpret multiple states’ executive orders?
- How do part-time, Union, and tipped employees affect the amount of my refunds?
On average, our clients get 40 percent more ERC refund funds than payroll companies or traditional income tax Certified Public Accountants (CPAs). So are you ready to get your most significant ERC tax credit? Estimate your refund with our free two-step form and make sense of your Employee Retention Credit.