Do I Qualify for ERC If I Got PPP?

The COVID-19 pandemic introduced various government relief programs designed to support businesses and their employees. Among the most prominent were the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). The ERC provided a refundable tax credit to eligible employers who retained employees, while PPP loans offered forgivable funds primarily for payroll and other operating expenses. Business owners frequently questioned whether they could qualify for the ERC if they had also received a PPP loan, leading to initial confusion. While early regulations imposed restrictions, subsequent legislative changes enabled businesses to benefit from both programs, provided specific rules were followed.

Basic Eligibility for the Employee Retention Credit

To qualify for the Employee Retention Credit, businesses generally met one of two primary criteria during the eligible periods in 2020 and 2021. One path to eligibility involved experiencing a significant decline in gross receipts. For 2020, this meant a decline of more than 50% in gross receipts for a calendar quarter when compared to the same quarter in 2019. Eligibility would cease in the quarter following the one where gross receipts exceeded 80% of the corresponding 2019 quarter.

For 2021, the gross receipts decline threshold was lowered to more than 20% compared to the same quarter in 2019, or the immediately preceding quarter. The alternative eligibility criterion was a full or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings related to COVID-19.

The credit applied to “qualified wages,” which included not only cash compensation but also qualified health plan expenses paid by the employer. These health plan expenses were considered qualified wages to the extent they were excluded from the employees’ gross income. The maximum credit amounts differed between the two years. For 2020, the credit was 50% of qualified wages, capped at $10,000 in wages per employee for the entire year, resulting in a maximum credit of $5,000 per employee.

In 2021, the credit was enhanced, offering 70% of qualified wages, with a cap of $10,000 in wages per employee per quarter. This allowed for a potential maximum credit of $7,000 per employee per quarter, totaling up to $21,000 per employee for the first three quarters of 2021.

Navigating ERC and PPP Loan Coordination

Initially, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which established both the Employee Retention Credit and the Paycheck Protection Program, prevented businesses from claiming the ERC if they had received a PPP loan. However, this restriction was retroactively repealed by the Consolidated Appropriations Act of 2021 (CAA 2021), a legislative change that allowed businesses to pursue both the ERC and PPP loan forgiveness.

A fundamental principle governing the coordination of these two programs is the “no double-dipping” rule. This rule stipulates that the same qualified wages cannot be used for both PPP loan forgiveness and the ERC. For PPP loan forgiveness, at least 60% of the loan amount generally had to be used for payroll costs during a chosen covered period, which could range from 8 to 24 weeks.

Businesses needed to carefully manage which wages were allocated to each program. The PPP “covered period” during which loan proceeds were spent played a crucial role in this allocation.

The interaction also involved the PPP loan forgiveness application process. The flexibility in choosing the PPP covered period, ranging from 8 to 24 weeks, offered some room for strategic planning to align with ERC-eligible quarters.

Identifying Qualified Wages with PPP Funds

Effectively identifying qualified wages for the Employee Retention Credit when also managing Paycheck Protection Program funds requires a precise methodology to prevent any overlap. Businesses typically started by identifying the total payroll costs incurred during their PPP covered period, which could be between 8 and 24 weeks. These payroll costs include salaries, wages, and qualified health plan expenses.

Within the PPP framework, a minimum of 60% of the forgiven loan amount had to be allocated to payroll costs. To maximize the ERC, businesses often prioritized using non-payroll costs, such as rent, mortgage interest, and utilities, for the remaining portion of their PPP forgiveness, up to 40% of the total.

Another important consideration was the “stacking” rule, which generally implied that wages were first considered for PPP loan forgiveness if they fell within the PPP covered period. Therefore, businesses needed to carefully track wages paid during periods that did not overlap with their PPP covered period, as these wages would be prime candidates for the ERC. If a business qualified for the ERC in quarters that extended beyond the PPP covered period, those wages could be claimed without PPP coordination concerns. Additionally, wages paid to employees that exceeded the PPP’s annualized $100,000 cap per employee could potentially be used for ERC purposes, as PPP forgiveness would not cover those excess amounts.

Steps to Claim the Employee Retention Credit

After determining eligibility and calculating qualified wages, the process of claiming the Employee Retention Credit involves specific procedural steps with the Internal Revenue Service (IRS). For past quarters, the ERC is typically claimed by amending previously filed employment tax returns using IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This form allows businesses to correct over-reported tax amounts and claim the credit retroactively.

To complete Form 941-X, businesses need to gather their original Form 941, Employer’s Quarterly Federal Tax Return, for the relevant quarters, along with detailed payroll records. On Form 941-X, businesses must identify the specific calendar quarter and year being corrected. They will then enter the total qualified wages and allocable qualified health plan expenses for that quarter. The form requires the calculation of the refundable portion of the ERC, which is entered on a specific line.

Accurate record-keeping is important to support the claim, as the IRS may request documentation to verify eligibility and the calculation of qualified wages. This includes records demonstrating the decline in gross receipts or the governmental orders causing suspension of operations, as well as payroll data. Once completed and signed, Form 941-X is submitted to the IRS. The IRS typically processes these amended returns, and refunds can take several weeks or months to be issued.