Companies all throughout the world have felt the effects of the recent COVID-19 outbreak. With many struggling to stay afloat and retain employees, the United States government has implemented several relief programs to help businesses weather the storm. Two such programs are the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP).
The ERC is a refundable tax credit designed to help businesses keep employees on their payroll, while the PPP is a loan program designed to provide small businesses with funding to cover payroll and other expenses. While both programs have similar goals, they differ in their eligibility criteria, how they work, and the benefits they offer.
It is crucial for businesses to choose the right program for their needs, as choosing the wrong one could result in missed opportunities for financial relief. In this article, we will explore the ERC and PPP in-depth, and provide guidance on how to determine which program is right for your business.
Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a tax credit designed to encourage businesses to keep employees on their payroll. The credit is fully refundable and can be claimed by eligible employers against payroll taxes; including the Social Security tax component of the employer’s share of FICA tax.
Eligibility for the ERC contingent upon either a considerable drop in gross income or a whole or partial suspension of activities as a result of a government order linked to COVID-19. The credit is available to businesses of all sizes, including tax-exempt organizations; except for state and local governments and their instrumentalities.
Eligible companies can get a credit from the ERC of up to $10,000 per employee every quarter for qualifying wages paid. Qualified wages include wages and certain health care costs paid to employees between March 12, 2020, and December 31, 2021.
Pros of the ERC include its flexibility in terms of eligible expenses; as well as the fact that it is fully refundable. This means that businesses can receive the credit even if it exceeds their payroll tax liability. However, a potential downside of the ERC is that it cannot be used in conjunction with the PPP.
When compared to the PPP, the ERC may be a better option for businesses that have already exhausted their PPP funds; as well as businesses that have experienced a significant decline in gross receipts but have not had to lay off employees. Additionally, the ERC may provide greater benefits for businesses with high-wage employees.
In summary, the ERC is a valuable option for eligible businesses looking to retain employees and receive financial relief. However, businesses should carefully weigh their options; and compare the ERC to the PPP to determine which program best suited to their needs.
Paycheck Protection Program (PPP)
To help small businesses meet payroll and other operating costs, the federal government offers the Paycheck Protection Program (PPP), a loan program. The program administered by the Small Business Administration (SBA) and intended to help businesses keep their employees on payroll during the COVID-19 pandemic.
Eligibility criteria for the PPP include having fewer than 500 employees; being a sole proprietor or self-employed individual, and being adversely affected by COVID-19. The loan amount calculated based on 2.5 times the borrower’s average monthly payroll costs; up to a maximum of $10 million.
The loan can be used for eligible expenses, including payroll costs, rent, utilities, and mortgage interest. If the funds used for eligible expenses, the loan can be fully forgiven; meaning that the borrower is not required to repay the loan.
Pros of the PPP include the potential for loan forgiveness; as well as the fact that the loan is available to a wide range of small businesses. However, a potential downside is that the loan forgiveness process can be complex and may require significant documentation.
When compared to the ERC, the PPP may be a better option for businesses that have not yet exhausted their PPP funds; and that have experienced a decline in revenue but have not been forced to suspend operations. Additionally, the PPP may be more suitable for businesses that have lower-wage employees.
In summary, the PPP is a valuable option for eligible small businesses looking to receive financial relief and retain employees. However, businesses should carefully consider the program’s eligibility criteria and loan forgiveness process before applying. Comparing the PPP to the ERC can also help businesses determine which program best suited to their needs.
Choosing the Right Program
When deciding between the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP); there are several factors that businesses should consider to determine which program is right for them.
One key factor is the business’s eligibility for each program. While the ERC is available to businesses of all sizes; the PPP is only available to small businesses with fewer than 500 employees. Additionally, the eligibility criteria for each program differ, with the ERC requiring businesses to have either partially or fully suspended operations or experienced a significant decline in gross receipts, while the PPP requires businesses to have been adversely affected by COVID-19.
Another factor to consider is the potential benefits of each program. While both programs aim to help businesses retain employees, the ERC provides a tax credit; while the PPP provides a loan that can forgiven if used for eligible expenses. Businesses should consider their current financial situation and determine which program’s benefits will be most advantageous for their needs.
Examples of businesses that may benefit more from one program over the other include businesses that have already exhausted their PPP funds and are looking for additional financial relief, as well as businesses that have high-wage employees and may receive greater benefits from the ERC. Additionally, businesses that have not had to suspend operations but have experienced a significant decline in gross receipts may find the ERC more suitable for their needs.
Businesses should carefully consider the eligibility criteria, potential benefits, and their specific needs before choosing between the ERC and PPP. By taking the time to evaluate each program’s pros and cons, businesses can make an informed decision; and choose the program that will provide them with the most significant financial relief; and help them retain their employees during these challenging times.
Conclusion
In conclusion, choosing between the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) can be a difficult decision for business owners. Both programs offer financial relief and aim to help businesses retain employees during the COVID-19 pandemic; but they differ in their eligibility criteria, benefits, and loan forgiveness processes.
To recap, the ERC provides a tax credit to eligible businesses that have partially or fully suspended operations or experienced a significant decline in gross receipts. The PPP, on the other hand, provides a loan that can be forgiven if used for eligible expenses; and is only available to small businesses with fewer than 500 employees that have been adversely affected by COVID-19.
When choosing between these programs, business owners should consider their eligibility, potential benefits, and specific needs. Businesses that have already exhausted their PPP funds and those with high-wage employees may find the ERC more suitable for their needs; while businesses that have not had to suspend operations but have experienced a significant decline in gross receipts may find the PPP more advantageous.
In terms of final thoughts and recommendations, business owners should carefully evaluate their options; and consult with a financial advisor or tax professional before applying for either program. It’s also important to note that these programs are subject to change; and businesses should stay informed about any updates or changes to the programs that may affect their eligibility or benefits.
Overall, the ERC and PPP are valuable options for small businesses looking to receive financial relief and retain employees during these challenging times. By taking the time to evaluate their options and choosing the program that best suits their needs; business owners can navigate these uncertain times with greater financial stability and security.