According to recent surveys, 43% of small businesses say that they'll be forced to permanently close their doors within weeks to months unless they get government assistance. As government shutdowns and social distancing guidelines continue to put significant pressure on small businesses, the government has stepped in with a stimulus bill aimed at providing critical assistance to businesses on the brink of collapse.
Signed into effect on March 27th, 2020, the CARES Act is a stimulus package that contains multiple programs designed to assist small businesses during the novel coronavirus crisis. Included in the CARES Act are the Paycheck Protection Program, 50% Employee Retention Tax Credit, and Social Security Tax Deferrals, all of which are designed to help small businesses.
Unfortunately, small businesses can't leverage all three packages. If small businesses obtain a PPP loan, they aren't eligible for the 50% employee retention credit.
It can be incredibly frustrating trying to figure out exactly which program you should pursue. At Zamp HR, we wanted to make a quick-and-easy post to help you understand the three primary stimulus programs available to small businesses so you can pick the one that makes the most sense for your unique business situation.
Paycheck Protection Program
The Paycheck Protection Program (PPP) allows small businesses with fewer than 500 employees to take out a forgivable loan to help pay workers during the pandemic. The maximum amount your business can qualify for is 250% of the average monthly payroll costs (averaged over the previous year) up to $10 million. As it currently stands, you can only deduct a maximum of $100,000 per employee. In other words, if an employee makes $125,000, you can only count them as earning $100,000 when it comes to getting forgiveness on the loan.
These loans don't require collateral, have a 1% fixed interest rate, and are due in two years. So long as you retain your employees, spend 75% of the loan on payroll, and don't cut wages by more than 25% for a period of eight weeks, the loan will be forgiven entirely.
This is the ideal solution for businesses with higher payroll costs — since they can acquire a bigger loan. The interest rates are low regardless of whether or not the loan is forgiven. So, we fully expect some businesses to leverage the loans to pay high utility, lease, or rent costs. But if you spend over 25% of the funds on bills, you won't qualify for forgiveness. This may make the loan less attractive to small businesses with few employees and high overhead costs.
- Businesses that have high payroll costs
- Businesses with high overhead looking for low-interest loans
- Businesses with few employees and high overhead
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is another stimulus program that gives employers a 50% tax credit on payroll taxes (up to $10,000 per employee) from March 12th, 2020, to Jan. 1st, 2021.
To qualify, your business has to show a 50% decline in gross receipt or have fully or partially suspended operation during the pandemic due to local, state, or government actions.
The ERTC doesn't require your business to have fewer than 500 employees, making it ideal for larger companies that have been experiencing a significant decline or business shutdown due to the coronavirus. There are a few catches:
- Employers can't qualify for ERTC and PPP.
- You can't stack tax credits from ERTC with FMLA or the Work Opportunity Tax Credit.
However, the IRS is allowing businesses to take advances on their ERTC credits, giving them extra liquidity to combat coronavirus downturns.
- Larger businesses that show a coronavirus-related decline that don't want to furlough workers.
- Small businesses looking to use a PPP loan.
- Businesses that haven't experienced a significant decline due to COVID-19.
Social Security Tax Deferral
Another provision in the CARES Act is social security tax deferral. Employers can defer their typical social security taxes (~6.2% of payroll, depending on wages) for a year. On December 31st, 2021, employers have to pay back 50% of the loan. On the same date the next year, they have to pay back the other half.
The IRS has recently clarified (see FAQ #4) that employers can take advantage of the social security tax deferral while applying for PPP. They will continue to receive forgiveness until the date that the PPP loan is forgiven. Given that this will likely be around September or October, employers can avoid social security taxes until these dates. Once you receive forgiveness, the social security tax deferral ends, but you do not have to pay a penalty, and the payback date stays the same for your previous months of deferral.
This is great news for companies with cash flow problems looking for immediate relief.
- Any business that can access the forgiveness program. Just remember, if you're applying for PPP, you will stop getting deferral once your loan has been forgiven.
How to Know Which Government Assistance Program Will Help Save Your Business During COVID-19
While the situations described in this post hold true for most businesses, there are plenty of cases where unique business situations may require a completely different approach to the stimulus packages. Businesses need the money to survive, and the government has stepped in with trillions of dollars in funds.
It's also essential that your business explores options outside of this stimulus package — like Utah Small Bridge Loans.
Are you wondering which program fits your business needs? We'll help you explore your options and find the best-fit program for your specific business situation. To learn more, contact us.