Amidst the ongoing COVID-19 pandemic, small businesses are facing unprecedented challenges. They are struggling to keep their doors open, pay their employees, and stay competitive in an uncertain market. The government has stepped in with various relief measures, but businesses find themselves overwhelmed by the variety of options and unsure which options to choose.
Two such options are the employee retention tax credit (ERTC) and Paycheck Protection Program (PPP). Both programs aim to help small businesses affected by the pandemic, but deciding which one is best for your business can be a tough call. In this article, we will examine the differences between ERTC and PPP and help you decide which one is right for your business.
The employee retention tax credit:
ERTC is a refundable tax credit that is available to businesses that have experienced a decline in revenue due to the COVID-19 pandemic. The credit is available for wages paid between March 13, 2020 and December 31, 2021. The maximum credit available is 70% of qualifying wages, up to $7,000 per employee per quarter. To get the maximum credit of $28,000 per employee, you must pay them at least $10,000 of qualified wages in each quarter.
Unlike the PPP, which is a loan that needs to be repaid, the ERTC is a credit that can be used to offset your payroll taxes or other taxes owed. If the credit exceeds the amount of taxes owed, you can request a refund for the excess. Since the credit is refundable, it can benefit businesses that do not owe any taxes.
To qualify for ERTC, your business must meet one of two criteria:
1. Your business operations were partially or fully suspended due to a government order related to COVID-19.
2. Your gross receipts in any 2021 quarter were less than 80% of gross receipts for the same quarter in 2019.
Paycheck Protection Program:
PPP is a loan that aims to help small businesses retain their employees during the pandemic. Any small business with fewer than 500 employees can apply for a PPP loan. The loan amount is based on your average monthly payroll costs, up to a maximum of $10 million. Loan forgiveness is available if you use the funds for eligible expenses such as payroll, rent, and utilities.
One of the primary benefits of PPP is that the loan amount can be forgiven if you meet certain criteria, such as using at least 60% of the funds for payroll expenses. PPP loan forgiveness is tax-free, which means that the forgiven amount does not count as income.
PPP loans have been popular among small businesses, and the government has made several changes to the program to make it easier to apply and qualify for the loan. However, the program has also faced several challenges, including reports of fraud, confusion about forgiveness, and a lack of transparency in the loan application process.
Which one is right for your business?
Choosing between ERTC and PPP depends on your business’s specific circumstances. Each program has its benefits and limitations, and you should consider both options before making a decision.
If your business is specifically looking to retain employees and is willing to take on a loan, PPP might be the better option. PPP provides more significant loan amounts, and the forgiveness aspect of the loan is very valuable. However, if you are struggling to pay the payroll taxes and have reduced revenue due to COVID-19, ERTC could be the better choice.
One significant detail to note is that you cannot claim both ERTC and PPP loan forgiveness for the same payroll expenses. If you have received PPP loan forgiveness, you cannot also claim ERTC for the same wages.
In conclusion, businesses struggling during the pandemic need all the help they can get. ERTC and PPP are two fantastic programs that can provide significant benefits to small businesses. Now that you know what each program offers, weigh the pros and cons to decide which one is right for your business.