The COVID-19 pandemic has been a challenging time for small businesses. Many businesses have had to shut their doors, reduce staff, or adjust their operations to stay afloat. As a result, the U.S. government has introduced various relief programs to help businesses during this difficult time. This includes the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). We will discuss ERC and PPP in this article.
Both the ERC and PPP are designed to provide financial relief to businesses. But they have different eligibility criteria, requirements, and benefits. This blog will compare the ERC and PPP to help you determine which program is right for your small business.
Eligibility for both ERC and PPP
Certainly! The ERC is available to a wider range of businesses than the PPP. It can be accessed by businesses of any size. This includes tax-exempt organizations. This is as long as they have experienced a decline in gross receipts. Or have been fully or partially suspended due to COVID-19-related government orders. To qualify for the ERC, businesses must have experienced a decline in gross receipts of at least 20% in any quarter of 2021. This is compared to the same quarter in 2019. Alternatively, businesses that were fully or partially suspended due to COVID-19-related government orders can qualify for the credit for any quarter. This is in which the suspension was in effect. On the other hand, to be eligible for the PPP, businesses must have been in operation as of February 15, 2020. This also has fewer than 500 employees (or other size limitations for specific industries).
In addition, businesses must demonstrate that they have been adversely affected by the pandemic. Of, if they have used or will use the funds to cover eligible expenses such as payroll, rent, and utilities. It’s important to note that businesses can apply for both the ERC and PPP. But they cannot use the funds for the same expenses. While the PPP is focused on covering payroll expenses, the ERC can be used to cover a wider range of expenses. This includes health insurance premiums, retirement benefits, and paid time off.
Loan Forgiveness in ERC and PPP
In terms of loan forgiveness, there are some key differences between the ERC and PPP. As mentioned, the ERC is a tax credit that does not need to be repaid. However, it’s important to note that the credit cannot be used to offset both payroll taxes and the same wages used to calculate other pandemic-related tax credits or loans. Additionally, any wages used to calculate the ERC cannot be used to calculate the Work Opportunity Tax Credit or the Family and Medical Leave Credit.
On the other hand, the PPP is a loan that can be forgiven if certain criteria are met. In addition to the requirement that at least 60% of the loan must be used for payroll costs, the business must also maintain employee and compensation levels or make efforts to restore them. If these criteria are not met, the loan must be repaid over a term of up to five years at an interest rate of 1%.
It’s also worth noting that there are different time periods for calculating loan forgiveness under the PPP and the ERC. The covered period for PPP loan forgiveness is generally eight to 24 weeks after the loan is received. While the ERC is based on qualified wages paid between March 13, 2020, and December 31, 2022.
Overall, the decision of whether to apply for the ERC and/or PPP will depend on the specific needs and circumstances of your business. It’s important to carefully consider the eligibility criteria, loan forgiveness requirements, and other factors before making a decision. Consulting with a financial professional or tax expert can also be helpful in determining the best course of action for your business.
Amount of Relief
The ERC and PPP provide different types and amounts of relief to eligible businesses. The ERC offers a tax credit that can be claimed on the business’s payroll taxes. Or, you can request an advance payment from the IRS. The credit amount is up to 70% of qualified wages paid to employees. This comes with a maximum credit of $5,000 per employee per quarter. This means that eligible businesses can receive up to $28,000 per employee in 2021. And also up to $19,000 per employee in 2022. The ERC can be used to offset payroll taxes or to receive a refund from the IRS. It also does not need to be repaid.
On the other hand, the PPP provides loans to eligible businesses that can be forgiven if at least 60% of the loan is used for payroll costs. The remaining 40% is used for eligible non-payroll expenses, such as rent, utilities, and mortgage interest. The loan amount is based on the business’s average monthly payroll costs, with a maximum loan amount of $10 million. The loan must be repaid if not used for eligible expenses or if the forgiveness requirements are not met.
It’s important to note that businesses can apply for both the ERC and PPP. But cannot use the funds for the same wages or expenses. However, the ERC can be used to offset payroll taxes that were not covered by the PPP loan. Overall, the ERC and PPP provide different types and amounts of relief to eligible businesses. It’s also important to consider the specific needs and circumstances of your business before deciding which program to apply for.
To claim the ERC, eligible employers can report the credit on their quarterly employment tax returns, Form 941, and reduce their required deposits of payroll taxes. The credit can also be requested as an advance payment by filing Form 7200 with the IRS. However, it’s important to note that eligible employers cannot claim both the ERC and the PPP for the same wages.
On the other hand, to apply for the PPP, small businesses need to work with a participating lender to complete the application process. The application requires providing documentation of payrolls and non-payroll expenses, such as rent and utilities, to determine the loan amount. The PPP loan is then deposited into the business’s bank account. Funds must be used within a specified time frame for eligible expenses to qualify for loan forgiveness.
It’s important to carefully consider which program is the best fit for your business, taking into account factors such as eligibility requirements, the amount of relief offered, and the application process. Additionally, businesses should consult with their financial advisor or accountant for guidance on how to best utilize these relief programs.
Get Expert Help: How Our Agency Can Assist Your Small Business in Accessing the Employee Retention Credit
The ERC is a tax credit that can provide cash flow to eligible businesses that have experienced a decline in gross receipts or operations due to COVID-19. The PPP is a loan that can be forgiven if used for eligible expenses, primarily payroll costs. Both programs have their advantages and disadvantages, and the right choice will depend on the specific needs and circumstances of your small business.
If you’re a small business owner looking to take advantage of the Employee Retention Credit, our agency can help you navigate the application process and maximize your benefits. Our team of experienced professionals can assist you in determining your eligibility, calculating your credit, and submitting your claim to the IRS. Contact us today to learn how we can help your business access the relief it needs to weather the economic impact of the pandemic.