employee retention credit vs. PPP: Understanding the Key Differences
The COVID-19 pandemic has caused significant disruptions to businesses across the globe. In response, governments worldwide have implemented various relief measures to support struggling businesses and their employees. In the United States, two major programs that have gained traction are the employee retention credit (ERC) and the Paycheck Protection Program (PPP). While both programs aim to provide financial assistance to businesses, it is crucial to understand the key differences between them to make informed decisions.
1. Purpose and Eligibility:
The employee retention credit (ERC) is a refundable tax credit designed to encourage businesses to retain their employees during challenging economic conditions. It is available to businesses, including tax-exempt organizations, that were fully or partially suspended due to government orders or experienced significant revenue declines in a specific quarter.
On the other hand, the Paycheck Protection Program (PPP) is a loan program established under the CARES Act. It aims to help small businesses keep their workforce employed by providing forgivable loans for payroll, rent, and other eligible expenses. To be eligible for PPP funds, businesses must meet size and revenue requirements and demonstrate that the loan will be used primarily for payroll costs.
2. Funding and Repayment:
The employee retention credit (ERC) is a tax credit that can be claimed on a quarterly basis. It allows eligible businesses to offset certain employment taxes, such as Social Security and Medicare taxes, against the credit amount. If the credit exceeds the business’s tax liability, it can be refunded.
In contrast, the Paycheck Protection Program (PPP) offers loans that can be forgiven if the borrower meets specific criteria. To have the loan forgiven, businesses must use at least 60% of the funds for payroll costs and the remaining 40% for eligible non-payroll expenses within a designated period. If the loan is not fully forgiven, it needs to be repaid at a low interest rate over a specified term.
3. Limitations and Requirements:
Under the employee retention credit (ERC), businesses can claim a credit of up to 70% of qualifying wages paid to employees, up to a maximum of $10,000 per employee per quarter. However, wages used to claim the ERC cannot also be used for PPP loan forgiveness, ensuring businesses do not double-dip benefits.
For the Paycheck Protection Program (PPP), loan forgiveness is contingent upon fulfilling certain conditions. These include maintaining employee and compensation levels during the specified covered period, spending the funds on eligible expenses, and allocating at least 60% of the loan amount towards payroll costs.
4. Duration and Availability:
The employee retention credit (ERC) was initially introduced under the CARES Act and was set to expire at the end of 2020. However, it has been extended through 2021 under the Consolidated Appropriations Act. Businesses that experienced significant revenue declines or faced government-imposed restrictions can still claim the credit.
The Paycheck Protection Program (PPP) has undergone several rounds of funding since its inception. The most recent extension, the PPP Extension Act of 2021, extends the program’s application deadline to May 31, 2021. However, funds are limited, and businesses need to act promptly to secure their loan.
Understanding the differences between the employee retention credit (ERC) and the Paycheck Protection Program (PPP) is vital for businesses seeking financial relief during these challenging times. Considering the purpose, eligibility requirements, funding, repayment terms, limitations, and availability of these programs will help businesses make informed decisions on which option best suits their needs. Ultimately, seeking professional guidance from accountants or financial advisors can provide valuable insights tailored to each unique situation.