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Is the Employee Retention Credit or the PPP better for your business?


Many businesses with employees other than the shareholder will be eligible for the Employee Retention Credit [ERC] of up to $5000 per employee. Some business will be better off taking this option rather than the PPP forgivable loan. To be eligible, the business must have been shutdown by government order, or gross receipts for any quarter are less than 50% of the same quarter in 2019. We’ll cover more details below.

[Note: Again, all businesses should be applying for the PPP, then make a decision between the PPP and the ERC when it comes time to sign and fund the loan.]

Credit for Employee Retention [ERC]:

Per Paychex: “All private sector employers (including non-profit organizations) may claim a refundable tax credit against employer Social Security tax equal to 50 percent of wages paid during the COVID-19 crisis, up to $10,000 in wages per employee. This generally applies to employers that were in operation in 2020 and whose operation is fully or partially suspended due to COVID-19. Private sector employers may also qualify if they experienced a 50% decline in gross receipts, as compared to the same quarter of the prior year. A private sector employer's eligibility ends with the calendar quarter following the first calendar quarter in which the gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year. Excludes paid sick leave or paid family leave wages paid under the FFCRA, however, this credit may apply to wages paid to the same employee once they return to work. Employers that receive the Employee Retention Credit for Closures Due to COVID-19 (CARES Act, Sec. 2301) are not eligible for the PPP.”


Note that FFCRA refers to the COVID paid leave and EXPANDED paid leave reviewed in the prior post/email. That payroll cannot be used to calculate the Employee Retention Credit.

Fortunately, there is no restriction with the ERC that the overall wages to employees must equal the prior year, as in the PPP forgivable loan. Also, non-taxable fringe health benefits are considered ‘wages’ for this purpose, but total wages in any 30 day period cannot exceed total wages for a typical 30 day period prior to COVID.

In addition, the credit is NOT available for wages to owners, nor for wages of relatives to the owner.

Here’s the IRS definition of an employer qualifying for the Retention Credit:

“The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.

Qualifying employers must fall into one of two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or

  2. The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

These measures are calculated each calendar quarter.”

So that is every business that was shut down or partially shut down in March. Those businesses qualify until their gross receipts in a quarter reach 80% for the same quarter in 2019, or until January 1, 2021, whichever comes first.

You can read the entire Retention Credit info at this link:

Translation: Employers can get reimbursed up to $5000 per employee as long as business is bad (50% or under in gross receipts).

If your business was closed mid-March due to a government order, late March wages would qualify, and subsequent wages (while the order is in place) all the way to January 1st 2021.

Or if once you’re business is open your gross receipts for April 1-June 30 are 50% or less than the same period in 2019, then you also qualify. And so forth each succeeding quarter until you get to 80% of prior business, or January 1, 2021, whichever comes first.

However, you cannot use this credit if you get the PPP loan (Paycheck Protection Program).

Therefore, there are circumstances when an employer is eligible for this $5000 credit per employee that they would take it over the PPP.

I have advised all to apply for the PPP, and each employing business should apply. When you get to that crossroads of funding the PPP versus taking an employer tax credit, it may be advisable to make a calculation to determine your best course of action.

How do you get the credit?:

Per IRS Revenue Procedure 2020-62, the employer can hold back ALL payroll withholdings, including federal income tax, social security and Medicare, and the employer matching payroll tax to give themselves that credit. This is confirmed by the IRS FAQ on the topic.

In real life, we are learning today that payroll processing companies will NOT do this because of potential liability, or for other business reasons (such as ADP that holds and invests for profit your payroll tax funds until the last day they must be remitted to State and Federal agencies). This would seem to force business owners to wait for a refund after filing the Form 941 quarterly report (due in July for Quarter 2)

If you process your own payroll on QuickBooks or Intuit Online Payroll, and possibly with other software, or your bookkeeper does, you would be able to retain the withholdings by NOT pushing that payroll tax payment button. Be careful here that you have the credits to back up the retention of withholding from employees’ pay checks.

The employer may receive an ADVANCE payment for this credit from the IRS by submitting Form 7200 if the held back employer tax deposits are not sufficient. I can only assume, but will need to verify, that submission of the form 7200 might also be possible to get funds from the IRS after your payroll processing company insists on sending your employer tax deposit funds to the IRS. If not, you may have to wait for a refund after filing your quarterly payroll report.

Let me know if you need assistance in making a decision regarding taking the forgivable PPP loan versus the Employee Retention Credit.

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