Employee Retention Tax Credit vs. Paycheck Protection Program

Employee Retention Tax Credit vs. Paycheck Protection Program: When the pandemic hit, the U.S. government rolled out two significant relief programs for businesses, the Employee Retention Tax Credit (ERTC) and the Paycheck Protection Program (PPP). These programs were intended to help businesses keep their doors open, protect jobs, and recover from the economic fallout of the pandemic. However, the two programs have distinct differences that business owners need to understand to make the right decision.

In this article, we will compare the Employee Retention Tax Credit and the Paycheck Protection Program to help businesses make informed decisions. We will explore each program’s benefits, eligibility requirements, and differences, enabling you to make the right decision for your business.

What is the Employee Retention Tax Credit (ERTC)?

The Employee Retention Tax Credit (ERTC) is a refundable tax credit that businesses can claim on their payroll taxes. This credit was created to help businesses keep employees on their payroll, even if they are not working due to the pandemic. The ERTC was signed into law under the CARES Act in March 2020, and it was extended through 2021.

• Eligibility for the ERTC To qualify for the ERTC, businesses must have been either fully or partially suspended due to a government order related to COVID-19. Alternatively, businesses may also qualify if they have experienced a significant decline in gross receipts, which is a decline of more than 20% in gross receipts compared to the same quarter in 2019.
• Benefits of the ERTC The ERTC allows businesses to receive a tax credit of up to 70% of qualified wages paid to employees, up to $10,000 per employee per quarter. This means that businesses can receive up to $28,000 per employee in tax credits for the entire year. Businesses that have fewer than 500 employees are eligible for the ERTC, and the credit can be claimed retroactively.

What is the Paycheck Protection Program (PPP)?

The Paycheck Protection Program (PPP) is a loan program designed to help small businesses keep their employees on the payroll during the pandemic. The PPP was established under the CARES Act and has been extended through the Paycheck Protection Program Flexibility Act (PPPFA) and the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act).

• Eligibility for the PPP To qualify for the PPP, businesses must have been in operation before February 15, 2020, and have 500 or fewer employees. Additionally, self-employed individuals, sole proprietors, and independent contractors are also eligible for the program.
• Benefits of the PPP The PPP provides businesses with a loan of up to 2.5 times their average monthly payroll costs, up to a maximum of $10 million. The loan can be forgiven if the business uses at least 60% of the funds for payroll costs and the remaining funds for eligible expenses such as rent, utilities, and mortgage interest.

ERTC vs. PPP: What are the differences?

Now that we have explored both programs, let us compare and contrast the ERTC and the PPP.

• Structure The ERTC is a tax credit that businesses can claim on their payroll taxes, while the PPP is a loan that businesses can apply for through participating lenders.
• Eligibility Requirements The eligibility requirements for the ERTC and PPP are different. The ERTC is available to businesses that were either fully or partially suspended due to a government order related to COVID-19 or that experienced a significant decline in gross receipts. On the other hand, the PPP is available to businesses that were in operation before February 15, 2020, and have 500 or fewer employees. Self-employed individuals, sole proprietors, and independent contractors are also eligible for the PPP.
• Use of Funds The ERTC allows businesses to claim a tax credit of up to 70% of qualified wages paid to employees, up to $10,000 per employee per quarter, for a maximum credit of $28,000 per employee for the entire year. The PPP provides businesses with a loan of up to 2.5 times their average monthly payroll costs, up to a maximum of $10 million. The loan can be forgiven if the business uses at least 60% of the funds for payroll costs and the remaining funds for eligible expenses such as rent, utilities, and mortgage interest.
• Tax Implications The ERTC is a tax credit that reduces the business’s tax liability dollar for dollar. The PPP loan is not taxable, but the forgiven amount is not deductible on the business’s tax return.

Which program is right for your business?

Both the ERTC and PPP have their unique features, and the right program for your business will depend on your specific circumstances. If your business has experienced a significant decline in gross receipts or has been fully or partially suspended due to a government order related to COVID-19, the ERTC may be the best option for you. The ERTC can provide significant tax credits that can help offset payroll and other business expenses.

If your business has been struggling to maintain payroll and has not experienced a significant decline in gross receipts, the PPP may be the right option for you. The PPP loan can provide much-needed cash flow to keep your business operating, and the loan can be forgiven if used for eligible expenses.

Employee Retention Tax Credit vs. Paycheck Protection Program (FAQs)

1. Can a business claim both the ERTC and PPP? Yes, businesses can claim both the ERTC and PPP, but not for the same wages. A business can use the PPP funds to pay eligible expenses and use the ERTC to offset payroll taxes.
2. How do I apply for the ERTC? Businesses can claim the ERTC on their payroll tax returns. For more information on how to claim the ERTC, visit the IRS website.
3. Can a business apply for the PPP more than once? No, a business can only receive one PPP loan.
4. Can a business apply for both the first and second PPP loans? Yes, businesses that received the first PPP loan can apply for the second PPP loan if they meet the eligibility requirements.
5. Is there a deadline to apply for the ERTC or PPP? Yes, the ERTC is available through the end of 2021, while the PPP application deadline is May 31, 2021.

Summary

In conclusion, both the Employee Retention Tax Credit and Paycheck Protection Program were created to help businesses survive the pandemic. While both programs have similar goals, they have different eligibility requirements, benefits, and tax implications. It’s essential to understand each program’s details and differences to make an informed decision about which program is best for your business. By understanding the features of each program, you can make a strategic decision that will benefit your business in the long run.