Employee Retention Credit Vs. Paycheck Protection Program (PPP)
by Abdul Aziz Mondal Business 13 March 2023
The COVID-19 pandemic has created unprecedented challenges for businesses worldwide, particularly in the area of employee retention. In response, the US government introduced two significant programs – the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) – to help businesses retain their employees and stay afloat during these challenging times.
While both programs aim to support businesses, they differ in their eligibility requirements, calculation of benefits, and use of funds. In this article, we will explore the key differences between ERC and PPP, their benefits and drawbacks, and which program may be more suitable for different types of businesses. Additionally, we will discuss the changes made to the programs due to COVID-19 and the importance of seeking professional advice before applying for either program.
Employee Retention Credit (ERC)
A new tax credit known as the Employee Retention Credit (ERC) was made available to businesses in March of 2020 as a result of the CARES Act. The ERC is intended to encourage businesses to keep their employees on the payroll during the COVID-19 pandemic. Here are the key points to consider under the heading of “Employee Retention Credit (ERC)”:
Eligibility Requirements
For a company to qualify for ERC, it must either have had a considerable drop in gross receipts or be completely or partially suspended as a result of a government order connected to COVID-19. Alternatively, the company must meet both of these requirements. Additionally, the business must have fewer than 500 employees.
Calculation Of Credit Amount
The ERC is calculated as a percentage of qualified wages paid to employees during the eligible period. The credit amount is 50% of qualified wages, up to a maximum of $5,000 per employee for the entire year.
Changes To The ERC Due To COVID-19
Due to COVID-19, the ERC has undergone several changes. The Consolidated Appropriations Act of 2021 expanded the credit and made it available to businesses that received PPP loans. It also increased the credit percentage from 50% to 70% and increased the maximum credit per employee from $5,000 to $14,000.
How To Claim The ERC
Employers can claim the ERC by reporting it on their federal employment tax returns, such as Form 941. Alternatively, businesses can request an advance payment of the credit by submitting Form 7200.
Benefits And Drawbacks Of The ERC
The primary benefit of ERC is that it provides businesses with a tax credit for retaining their employees during the pandemic. Additionally, the expanded credit amount and eligibility criteria make it more accessible to businesses than before. To be eligible for the credit, enterprises must either have had a large decrease in gross receipts or be completely or partially suspended owing to an order from the government. This requirement is the primary disadvantage of credit. Moreover, the process of claiming credit can be complex, and there are potential risks of audits and penalties for non-compliance.
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP) is a loan program introduced by the US government as part of the CARES Act to provide financial assistance to small businesses impacted by the COVID-19 pandemic. Here are the key points to consider under the heading of “Paycheck Protection Program (PPP)”:
Eligibility Requirements
To be eligible for PPP, businesses must have 500 or fewer employees and demonstrate that they were negatively impacted by the COVID-19 pandemic. This includes experiencing a decline in revenue or supply chain disruptions.
Loan Terms And Forgiveness
PPP loans have a 1% interest rate and a repayment term of two years. However, the loan can be fully or partially forgiven if the business uses at least 60% of the loan proceeds for payroll expenses, and the remaining 40% for eligible non-payroll expenses, such as rent or utilities.
Changes To The PPP Due To COVID-19
The PPP underwent several changes due to the COVID-19 pandemic. The Consolidated Appropriations Act of 2021 extended the program’s deadline to apply for the loan, expanded the list of eligible expenses, and made the loan forgiveness process more flexible.
How To Apply For The PPP
Businesses can apply for PPP loans through participating lenders. The application process requires providing documentation to demonstrate the business’s eligibility and its ability to repay the loan.
Benefits And Drawbacks Of The PPP
The primary benefit of PPP is that it provides businesses with financial support to cover payroll and other expenses during the pandemic. Additionally, the loan can be fully or partially forgiven, which can significantly reduce the financial burden on businesses. However, the loan application process can be complex, and businesses must use the funds for specific purposes. Moreover, PPP loans are subject to audits, and non-compliance can result in penalties and legal consequences.
ERC Vs. PPP: Key Differences
Although the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) are both designed to provide financial assistance to businesses impacted by the COVID-19 pandemic, they differ significantly in their eligibility requirements, calculation of benefits, and use of funds. Here are the key differences between ERC and PPP:
1. Eligibility Requirements
To be eligible for ERC, a company must either have totally or partially halted operations as a result of a government order linked to COVID-19 or have seen a considerable decrease in gross receipts. Additionally, the business must have fewer than 500 employees. In contrast, PPP is available to businesses with 500 or fewer employees that have been negatively impacted by the COVID-19 pandemic.
2. Calculation Of Benefits
The ERC is a tax credit that provides eligible businesses with a credit of up to 70% of qualified wages paid to employees, up to a maximum of $14,000 per employee. The credit is claimed on the business’s federal employment tax returns. In contrast, PPP provides businesses with loans of up to 2.5 times their average monthly payroll costs, up to a maximum of $2 million. The loan is forgiven if the business uses at least 60% of the loan proceeds for payroll expenses and the remaining 40% for eligible non-payroll expenses.
3. Use Of Funds
The ERC is a tax credit that businesses can use to offset their federal employment tax liability. In contrast, PPP loans must be used for specific expenses, such as payroll, rent, utilities, and mortgage interest.
4. Loan Forgiveness
The ERC is a tax credit and does not require repayment. In contrast, PPP loans can be forgiven if the business meets certain criteria. However, PPP loan forgiveness requires a complex application process and can be subject to audits.
5. Application Process
The ERC is claimed on the business’s federal employment tax returns, while PPP requires a separate loan application process through participating lenders.
In summary, while both ERC and PPP aim to support businesses impacted by the COVID-19 pandemic, they differ significantly in their eligibility requirements, calculation of benefits, use of funds, loan forgiveness, and application process. Therefore, businesses must carefully evaluate their options and seek professional advice before applying for either program.
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