The employee retention credit is a fully refundable tax credit that eligible employers request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. The ERTC is a refundable credit that companies can request on qualifying salaries, including certain health insurance costs, paid to employees.
So when it comes to a PPP loan versus an employee retention credit, which one should you choose? Thanks to the Consolidated Appropriations Act, you no longer have to choose. You can now apply for the ERC and apply for a PPP loan. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) established both the Paycheck Protection Program and the Employee Retention Credit. In addition, several laws since then (for example, you can apply for the Paycheck Protection Program loan, apply for the employee retention credit, and apply for the paid leave credit from the FFCRA).
If you choose to apply for the employee retention credit and the credits for paid vacation, you won't be able to apply for those credits with the same salary. Because you can only apply for paid vacation credits on paid vacation wages, you cannot apply for the employee retention credit on paid vacation wages from the FFCRA. This law allowed some employers most affected by financial difficulties to be able to claim the credit against the qualified salaries of all their employees, rather than just those who did not provide services. Employers with 100 or fewer full-time employees can use all the salaries of employees who work, as well as any paid time that they are not working, with the exception of paid vacation provided under the Families First Coronavirus Response Act.
It allows employers who are required to provide paid leave due to the coronavirus to receive a tax credit in the amount of paid leave wages. Eligible employers, including PPP beneficiaries, can apply for a credit against 70% of qualified wages paid. However, people who are self-employed cannot apply for credit for their services or income from self-employment. The prepayment of any part of the ERC received by an employer that exceeds the amount to which the employer is entitled is an erroneous refund that the employer must reimburse.
Previously, the Consolidated Appropriations Act expanded the requirements to include companies that applied for a loan under the Paycheck Protection Program (PPP), including borrowers from the initial round of the PPP who were not originally eligible to apply for the tax credit. And if you receive a loan from the Paycheck Protection Program and apply for credits for paid vacation, paid vacation salaries are not counted as eligible “payroll costs” under PPP loan forgiveness. Consequently, it is important to ensure that all eligible expenses, including non-payroll costs, such as utility, rent and operating expenses, to name a few, are included in PPP loan forgiveness requests in order to maximize the qualifying salaries available to the ERTC. This law increased the employee limit to 500 to determine what salaries are applicable to the credit.
Employers who use a Professional Employers Organization (PEO) or Certified Professional Employer Organization (CPEO) do not file an individual 941 on their behalf, so it's important that they understand how they would reconcile this information and receive credit. Also, remember that if a customer has applied for a PPP loan and will be forgiven for it, they can now be eligible for the employee retention credit with certain salaries. The IRS has protective measures to prevent wage increases from being counted for the credit once the employer is eligible to receive the employee retention tax credit. To apply for credit for previous quarters, employers must file Form 941-X, Employer Adjusted Quarterly Federal Tax Return or Request for Refund, for the applicable quarters in which qualifying wages were paid.
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