Is The Employee Retention Credit Better for Restaurants?
The CARES Act is an acronym for Coronavirus Aid, Relief, and Economic Security. The commas in the acronym are important. They denote choices. So while it provided a lot of much needed support, it also provided the difficulty of deciding which option is best. Unfortunately, deciding on the best choice for your small business isn’t always obvious or easy.
Businesses must choose between
- A combination of claiming tax credits and deferring payroll tax deposits, known as the Employee Retention Tax Credit (ERTC)
OR
- The other choice is a small business loan that can be converted into a grant, known as the Paycheck Protection Program (PPP)
The two are mutually exclusive and if you take the PPP Loan you can not take the tax credits or defer payroll tax payments
So what are they?
Paycheck Protection Program: The PPP is a forgivable loan employers can apply for through an approved lender to help cover payroll costs (wages up to $100,000, employee benefits, and state and local taxes). Employers can also use some of the funds (25%) to cover interest on mortgages, rent, and utilities.
Employee Retention Credit: The credit is a refundable payroll tax credit the employer can claim on their federal employment tax return to cover employee wages and qualified health plan expenses associated with those wages.
Are you eligible?
Paycheck Protection Program: All small businesses with 500 or fewer employees and some businesses in certain industries with more than 500 employees can apply for a PPP loan. This includes self-employed individuals, independent contractors, sole proprietorships, nonprofits, veterans organizations, and tribal businesses.
Employee Retention Credit: Employers of any size are eligible for the Employee Retention Credit if they meet the qualifications. But, self-employed individuals cannot claim the credit for their self-employment services or earnings.
When will you get your money?
Paycheck Protection Program: Small businesses and sole proprietorships can apply between April 3, 2020 – June 30, 2020. Independent contractors and self-employed individuals can apply between April 10, 2020 – June 30, 2020. Please note that funds are limited, and loans are based on a first-come, first-served basis.
Employee Retention Credit: Employers can claim this payroll tax credit on qualifying wages paid between March 13, 2020 – December 31, 2020.
Which should you choose?
Ultimately, the decision is yours. Calculate how much you could receive with both relief options to determine which is better for your business.
Consider:
- How much are you eligible for in employee retention tax credit?
Now compare that to:
- How much would you spend on eligible payroll expenses in the eight weeks from when you get the loan?
- Will eligible payroll expenses account for 75% of the PPL amount?
- If not, are you willing to pay 1% interest for two years to fund the PPL and do you have an eligible use for the proceeds?
Here’s one example of an analysis:
Let’s say a restaurant has 40 employees on payroll, most of whom work part-time. Let’s also assume the average annual wages for each employee was around $18,000. The restaurants average monthly payroll would be around $60,000.
Under PPP:
the restaurant can borrow up to 2.5 times monthly payroll, or $150,000.
But under the ERTC:
the restaurant would be due a refundable payroll tax credit equal to $200,000 ($5,000 per employee).
The employee retention credit generates $50,000 more cash flow than a PPP.
No double-dipping
Although you can’t claim both the PPP loan and the Employee Retention Credit, you can claim either and the FFCRA paid leave credit.
The paid leave tax credit was established under the Families First Coronavirus Response Act. It lets employers who are required to provide coronavirus paid leave receive a tax credit for the amount of the paid leave wages.
You can apply for the Paycheck Protection Program loan and claim the FFCRA paid leave credit. You can also claim both the Employee Retention Credit and the paid leave tax credit.
However, you cannot double-dip.
If you choose to take the Employee Retention Credit and the paid leave credits, you can’t claim those credits on the same wages. Because you can only claim the paid leave credits on paid leave wages, you cannot claim the Employee Retention Credit on FFCRA paid leave wages.
And if you receive a Paycheck Protection Program loan and claim paid leave credits, the paid leave wages do not count as eligible “payroll costs” under the PPP’s loan forgiveness. Because you claim the paid leave credit on FFCRA paid leave wages, do not count FFCRA paid leave wages as payroll costs when asking for PPP loan forgiveness.
If you’re still unsure which option is the best option for you. It’s okay, we are here to help. Book your consultation today. We’ll walk you through all the possible options, calculate the savings for each and help you choose which is right for you.