Can You Get Employee Retention Credit and PPP?
Navigate the complexities of claiming both Employee Retention Credit and PPP for your business to maximize available federal relief.
The U.S. government implemented several economic relief programs during the COVID-19 pandemic to support businesses and retain employees. Two prominent initiatives were the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). The ERC was designed as a refundable payroll tax credit to encourage businesses to keep employees on their payroll, even when facing significant disruptions or declines in gross receipts. The PPP, conversely, offered forgivable loans intended to help businesses cover payroll costs, rent, mortgage interest, and utility payments. Initially, businesses faced a restriction on participating in both programs, creating a dilemma for many seeking financial assistance. This article will clarify how these programs can now interact, allowing businesses to potentially benefit from both forms of relief.
Understanding the Original Program Restrictions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, established both the Employee Retention Credit and the Paycheck Protection Program. The ERC was a refundable tax credit against certain employment taxes, calculated as a percentage of qualified wages paid to employees. Its purpose was to incentivize employers to retain staff during periods of economic hardship caused by the pandemic.
The PPP provided forgivable loans to help businesses maintain payroll and cover specific operating expenses. These loans could be fully forgiven if a certain percentage, typically 60%, was used for payroll costs. Under the CARES Act, businesses that received a PPP loan were prohibited from claiming the ERC. This created a challenging choice, as businesses had to select one program over the other. The legislation prevented employers from simultaneously accessing these relief mechanisms.
The Consolidated Appropriations Act and Dual Eligibility
The Consolidated Appropriations Act (CAA), 2021, signed into law on December 27, 2020, brought a significant legislative change. This act retroactively amended the CARES Act, removing the restriction that prevented businesses from receiving both a PPP loan and claiming the Employee Retention Credit. This change meant employers who had obtained a PPP loan could now also be eligible for the ERC, including for wages paid after March 12, 2020. The retroactive application allowed businesses to revisit past financial decisions.
While the CAA allowed dual eligibility, it introduced a rule to prevent “double-dipping” on the same wages. Businesses cannot use the same qualified wages to both claim the ERC and obtain PPP loan forgiveness. Careful coordination is required to maximize benefits from both programs. This legislative shift provided an opportunity for employers to claim tax credits for 2020 and 2021, in addition to any tax-free PPP loan proceeds received.
Navigating Wage Coordination and PPP Forgiveness
Businesses utilizing both the Employee Retention Credit and the Paycheck Protection Program cannot use the same wages for both benefits. If wages were used for PPP loan forgiveness, those specific wages are ineligible for calculating the ERC. Businesses must carefully identify and allocate qualified wages to avoid this overlap, ensuring compliance with IRS guidelines.
To maximize benefits, businesses can strategically designate different payroll periods or different sets of employees for each program. For instance, if a business had more payroll costs than were strictly necessary for full PPP loan forgiveness, the excess wages could potentially be used for the ERC. Only the minimum payroll costs required for PPP loan forgiveness are prohibited from being used for the ERC. This allows for flexibility in how wages are allocated.
Businesses that already received PPP loan forgiveness based on wages that could now qualify for the ERC need to re-evaluate their wage allocation. Forgiveness applications often reported all payroll costs, even if a portion exceeded the amount needed for full forgiveness. The IRS guidance indicates that wages reported on a PPP forgiveness application, up to the minimum amount sufficient for full loan forgiveness, are deemed to have been used for PPP. Any wages beyond that threshold, if otherwise qualified, may be eligible for the ERC.
Amending Tax Filings for Dual Benefits
Businesses eligible for the Employee Retention Credit after receiving a Paycheck Protection Program loan must amend previously filed tax forms. IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is used for this purpose. This form allows employers to correct errors on a previously filed Form 941 (Employer’s Quarterly Federal Tax Return) or to retroactively claim credits like the ERC.
When preparing Form 941-X, businesses must gather original Form 941s and detailed payroll records for the quarters they wish to amend. The form requires specific identifying information, including the Employer Identification Number (EIN), and details about the quarter and year being corrected. Businesses indicate on the form they are claiming the ERC, often by selecting boxes related to over-reported tax amounts.
The refundable and nonrefundable portions of the ERC are reported on specific lines of Form 941-X, such as Lines 18 and 26. Qualified wages used for the ERC are reported on Line 30, and qualified health plan expenses on Line 31. After completing relevant sections, businesses must provide an explanation for the correction, such as “Amending return to apply for ERC Credits,” and sign the form. Form 941-X must be mailed to the IRS, as it is typically not filed electronically for these retroactive claims. The deadline for amending returns to claim the ERC for 2020 wages is generally April 15, 2024, and for 2021 wages, it is April 15, 2025.