PPP Loans vs. Employee Retention Credits

According to the National Foundation for Credit Counseling, over two-thirds of small businesses have turned to a government loan program to finance their operations during the COVID-19 pandemic. With many organizations now beginning to consider reopening and lifting restrictions, businesses are looking for new ways to keep their employees on the payroll. This is where the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) come into play. The PPP loans and the ERC both provide financial support to businesses, but there are key differences between them.

What Are Employee Retention Credits?

The Credit for Employee Retention, or “ERC,” was created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This program provides tax credits for employers for up to 50% of wages paid to employees between March 13, 2020 and December 31, 2021. If a business decides to take advantage of the ERC program, they can claim a credit on their 2020 Form 941 of up to $5,000 per employee who was not terminated due to COVID-19.

Who Are Eligible Employers?

Generally, businesses that experienced a significant decrease in revenue due to COVID-19 are eligible to receive the employee retention credit. To determine eligibility, businesses are asked to compare their revenue in any 2020 calendar quarter to revenue in the same calendar quarter in 2019. Businesses that experience a revenue decrease of more than 50% are eligible for the ERC.

What Is the Payroll Protection Program?

The PPP was created by the CARES Act and is designed to help employers cover payroll expenses, as well as rent, mortgage interest, and utilities for their business. Loans are available for amounts up to 2.5 times the employer’s average monthly payroll costs. The loan amounts are 100% forgivable if the funds are used for their intended purposes.

3 Differences Between The PPP and ERC
While the PPP and ERC are both designed to help employers in the midst of the COVID-19 pandemic, they are two distinct lending programs. There are three major differences between the two.

1. Types of Funding
The PPP provides loans, while the ERC is a tax credit. The PPP loans must be repaid in full within two years (though they are 100% forgivable if the funds are used for covered payroll expenses). The ERC credits can be used to reduce the employer’s federal payroll tax liability, but cannot be used to pay any wages.

2. When Businesses Receive Funding
The PPP offers the potential to receive immediate funds, while the ERC is available once the employer has already paid out wages and filed their 941 tax form. PPP loans are distributed by lenders, while ERC credits are claimed from the IRS.

3. Cost Comparison
The PPP loans can cost businesses up to 2.5 times their average monthly payroll costs whereas the ERC credits cover up to 50% of wages. The PPP offers more immediate cash-flow for businesses, but the ERC credits tend to provide more significant long-term savings.

Can You Get Employee Retention Credit and PPP?
Yes, businesses are eligible to receive both the PPP loan and the ERC credit. The PPP loan can be obtained to fund payroll expenses and the ERC credit can then be applied to reduce the employer’s federal payroll tax liability.

How to Apply for PPP and ERC
The PPP loan application process is handled through lenders, while the ERC application process is handled through the IRS. The PPP loan application process involves submitting the most recently completed IRS form 941, along with a Statement of Operating Expenses, a financial statement, and other relevant documents. The ERC application process involves submitting Form 941, Form 5884, and other information, depending on the specific type of employer filing.

Conclusion

The PPP loans and ERC credits provide financial relief and assistance to businesses that have been affected by the COVID-19 pandemic. While both programs provide businesses with financial support, there are some key differences between them. The PPP loan is designed to provide businesses with immediate cash-flow, while the ERC credit is designed to provide long-term savings. Businesses are eligible to receive both the PPP loan and the ERC, but must be mindful of the differences between the two programs for maximum benefit.