During the COVID-19 pandemic, a significant number of small businesses turned to government loan programs to sustain their operations. As restrictions ease and businesses contemplate reopening, finding ways to retain employees becomes crucial. The Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) have emerged as two important avenues for financial support. While both programs offer assistance to businesses, they differ in key aspects.
Understanding Employee Retention Credits
The Employee Retention Credit (ERC) was established through the CARES Act to provide tax credits to employers for up to 50% of wages paid to employees between March 13, 2020, and December 31, 2021. By taking advantage of the ERC program, businesses can claim a credit on their 2020 Form 941, with a maximum credit of $5,000 per employee who was not terminated due to COVID-19.
Eligibility for Employers
Generally, businesses that experienced a significant decline in revenue due to the pandemic are eligible for the employee retention credit. To determine eligibility, businesses compare their revenue in any 2020 calendar quarter to the same quarter in 2019. Those with a revenue decrease of over 50% qualify for the ERC.
Understanding the Payroll Protection Program
The Paycheck Protection Program (PPP), also created by the CARES Act, aims to assist employers in covering payroll expenses, rent, mortgage interest, and utilities. Loans can be obtained for up to 2.5 times the employer’s average monthly payroll costs. These loans are 100% forgivable if used for their intended purposes.
Three Key Differences Between PPP and ERC
While both the PPP and ERC assist businesses during the pandemic, they operate as distinct programs with three significant differences.
- Types of Funding: PPP offers loans, while ERC provides tax credits. PPP loans must be repaid in full within two years, but they can be forgiven if used for covered payroll expenses. ERC credits reduce the employer’s federal payroll tax liability but cannot be used for wage payments.
- Timing of Funding: PPP offers immediate access to funds, while ERC credits are available after the employer has paid wages and filed the 941 tax form. PPP loans are distributed by lenders, whereas ERC credits are claimed through the IRS.
- Cost Comparison: PPP loans can amount to 2.5 times the average monthly payroll costs, while ERC credits cover up to 50% of wages. PPP loans provide immediate cash-flow, whereas ERC credits yield substantial long-term savings.
Eligibility for Both ERC and PPP
Businesses are eligible to receive both PPP loans and ERC credits. The PPP loan can fund payroll expenses, while the ERC credit can be applied to reduce the employer’s federal payroll tax liability.
Application Process for PPP and ERC
The PPP loan application is facilitated through lenders, while the ERC application is handled by the IRS. Applying for a PPP loan involves submitting the most recent IRS Form 941, along with a Statement of Operating Expenses, a financial statement, and relevant documents. The ERC application process entails submitting Form 941, Form 5884, and other necessary information based on the employer’s filing type.
Conclusion
PPP loans and ERC credits offer financial relief to businesses affected by the pandemic. Although both programs provide support, they differ in their immediate cash-flow versus long-term savings approaches. Businesses can avail themselves of both the PPP loan and ERC credit, but understanding the distinctions between the programs is essential to maximize benefits.