PPP Loans vs. Employee Retention Credits

PPP Loans vs. Employee Retention Credits

Introduction

Whether it’s ERC or PPP, both are important for business owners. In fact, Employee Retention Credit and PPP have become essential solutions for employers to recoup some of their losses and mitigate the overall COVID-19 impact.

While the ERC assists employers in retaining payroll tax credits from their full-time workers on the payroll, the PPP provides direct financial support to small businesses. ERC and PPP are both solid programs and have managed to help many enterprises sustain operations in the tumultuous COVID-19 era.

In 2023, the pandemic crisis may seem like a thing of the past, but many businesses are still reeling from its effects. This is where ERC and PPP shine and set businesses on the path of recovery and sustainability.

Payroll Protection Program Basics

In the PPP vs. ERC discourse, PPP serves as a loan program targeted to small businesses and non-profit organizations. Companies can secure PPP loans for more than 2.5 times their average monthly payroll expenses. PPP loans are capped at a whopping $10 million. 

Moreover, PPP features flexible loan terms. Loans are forgivable as long as the businesses use the funds for eligible payroll costs. Now, to qualify for the PPP and its loan forgiveness, the main requirement for the companies is to have less than 500 employees.

Ultimately, the PPP loan initiative became a shining armor in rescue for small businesses to retain their workers amidst the tough COVID-19 period. SBA, or Small Business Administration, administers the Payroll Protection Program, offering over $10 million to a wide range of small businesses that faced financial difficulties during the pandemic.

The hallmark aspect of PPP loans is that they’re forgivable. But this forgiveness works on the requirement and assumption that businesses use the secured funds to either rehire or retain their employees. From the start, PPP has been successful and continues to help businesses retain their employees throughout the country.

Employee Retention Credit Basics

ERC is a tax credit refundable program tailored for employers who managed to retain their full-time employees amidst COVID-peak wave in 2020-21. ERC tax credit can cover 50% of the eligible paid wages to full-time employees. It can help employers cover over $10,000 for each employee.

However, the condition to claim the employee retention tax credit is that employers must’ve paid salaries from March 2020 until December 2021. When qualifying for the employee retention tax credit, businesses need to showcase and prove that they faced partial or complete shutdown of operations as a direct result of the COVID-19 lockdowns.

Employers can also leverage employee retention tax credit if their gross receipts had a significant decline in 2020-21 due to COVID-19. ERC, as a tax credit program, is perfectly designed to help small businesses hold onto their full-time workers during the peak COVID-19 period. And contrary to naïve misconception, different types and sizes of businesses can secure ERC. Whether it’s a corporation, partnership, or sole proprietorship, employers can leverage employee retention credit.

ERC and PPP: What are the Main Differences?

Businesses need to understand that there is more than one difference between Employee Retention Credit and PPP. Instead of falling into the cobweb of ERC credits and overlapping ERC vs. PPP, focus on the main difference to make the right measures and benefit the program that suits your business needs.

Both ERC and PPP are designed to help businesses get through the financial turmoil induced by the pandemic. Despite what you may have heard, PPP and ERC are not interchangeable. In fact, each program has its unique touchpoints, benefits, and specific eligibility requirements.

In the context of ERC vs.PPP, let’s take a look at the main differences:

Refund Processing Window

You can get the money through direct deposit if you’re eligible for the PPP funds. It usually takes around ten days to approve a PPP loan. Conversely, employers receive an employee retention credit “after” submitting Form 941-X.

Once the IRS checks the authenticity of your claim – you can expect it to process the tax credit and get you a check. On average, it takes from three to six months to process an employee retention tax credit. Ideally, you should reserve a spot in line to file the required documents with the IRS as soon as possible.

Funding of ERC vs. PPP

ERC and PPP have different eligibility, requirements, and style of funding. Both programs offer small businesses financial assistance at their core, but the underlying purposes of PPP and ERC differ. Once a business secures the PPP loan, it can use it to cover rent, utilities, payroll costs, or other expenses. On the flip side, employers don’t have to repay the ERCs. All sizes of businesses can apply for PPP loans, while employers with less than 500 employees can claim ERC.

Awards and Benefits

The full extent of benefits and awards attached to PPP and ERC are different. In PPP, one of the main eligibility requirements for businesses is to maintain a $100,000 maximum salary. So, if one of your workers earns over $100,000 – you can mention $100,000 on the application.

You can also include payroll expenses like retirement contributions, vacation pay, paid sick leave, severance pay, and health insurance. You’ll need to calculate these expenses using your 2020 payroll expenses. PPP remains a crucial plan that helped hundreds and thousands of businesses sustain operations amidst the wrath of the COVID-19 pandemic.

PPP ensures employers have the resources to cover payroll expenses and maintain quarterly or yearly operations. PPP is an effective measure to avoid significant layoffs and impact the economy as a whole. On the flip side, the awards and benefits attached to ERC have their own highs and lows.

Number of Full-time EmployeesLow ERC AwardHigh ERC Award
5$25,000$130,000
20$100,000$520,000
50$250,000$1,300,000
100$500,000$2,600,000
500$2,500,000$13,000,000

ERC and PPP Cost 

Employers can apply and register for the PPP loan for free. Businesses may incur a nominal cost when they don’t utilize the loan proceeds on eligible expenses and have to return the amount. But there is also no federal government charge or fee to get back the employee retention credit. On the other hand, ERC is a tax credit that businesses can get by filing their amended payroll tax for different qualifying tax periods. As far as expenses go, you may incur a small service charge for filing tax forms.

Can You Secure PPP and Employee Retention Credit?

In the beginning, small employers that got PPP loans couldn’t claim employee retention claim. After the 2021 Consolidated Appropriations Act, businesses that get a PPP loan can retroactively claim ERC all the way to 2020. What’s the catch? Employers cannot use the paid salaries that are eligible for the loan.

Employers need proper documentation to demonstrate they’re not double dipping into PPP and ERC programs to recoup the same paid wages. For example, if an employer used its PPP resources to pay wages worth $50,000 and expects loan forgiveness. In this case, the employer uses the already forgiven paid salaries to determine the ERC.s

Availability of PPP in 2023

Officially, PPP ended on May 2021, but businesses announced in July 2021 to extend the timeframe of the Paycheck Protection Program. Businesses may expect to see a similar plan in the coming years. Whether it’s a non-profit leader or a small business owner, stay updated about the newest PPP news and trends.

Employers should also check whether or not they’re eligible for an ERC loan that allows businesses to potentially get an advanced payment on their employee retention tax credit in exchange for interest on their loan. And all this works while businesses wait for the claim approval from the IRS.

Is it Difficult to Apply for ERC and PPP?

In 2023, businesses will have multiple options to recoup payroll costs. Recently, ERC has had a number of updates, and new changes in both programs befuddle businesses. If some questions are left open – employers find it more difficult to claim Employee Retention Credit or PPP.

As an eligible employer, you can count on a tax specialist to file Form 941-X for amended payroll tax returns for a specific quarter. It is the safest way to file your amended returns and ensure the IRS processes due credit and sends a check.

Wrapping Up

Small businesses should see PPP and ERC as opportunities to sustain and optimize their operations. Whether it’s financial support or payroll assistance, funds from the PPP and ERC can change the trajectory of small businesses. In hindsight, the funds employers get through Payroll Protection Program or Employee Retention Credits are bound to help them succeed in the foreseeable future.

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