The Coronavirus Aid, Relief, and Economic Security (CARES Act) outlines the provisions for both the Paycheck Protection Program, or PPP, and the Employee Retention Credit, or the ERC. Understanding the difference between the two is essential to ensure compliance and take advantage of the CARES Act benefits that make the most sense for your business.
Paycheck Protection Program
The PPP incentivized small businesses to keep employees on the payroll during the pandemic. Companies with less than 300 employees could take out up to two loans if they had a 25% or more reduction in gross receipts in the outlined timeframe. Any funds awarded could be used for payroll, benefits, utilities, rent, interest, the cost associated with protecting workers from COVID-19, and other (very specific) costs outlined by the Small Business Administration.
Those who used the loan's proceeds for eligible costs may be eligible for loan forgiveness. Borrowers who want to be considered for loan forgiveness must submit an application for forgiveness to their lender. The application must be submitted no later than the loan's maturity date.
Employee Retention Credit
The ERC was also established in March 2020 under the CARES Act and offered a refundable tax credit of 50% of up to $10,000 in wages paid by an eligible employer impacted by the pandemic. Through their quarterly filings, employers could claim the credit in 2020 and 2021 (for wages paid between March 13, 2020, and September 30, 2021). ERC is available to both small and large employers, but the provisions vary depending on the employer's size.
To be eligible to claim the credit, employers must have suspended work wholly or partially in response to governmental orders or experienced a significant decline in revenue.
Eligibility for Employee Retention Credit
You can take advantage of the Employee Retention Credit program if you meet the eligibility criteria to apply for the credit. Previously drawing one or two Paycheck Protection Program loans does not disqualify you from taking advantage of the credit.
Paycheck Protection Program vs. Employee Retention Credit
To summarize, the PPP loan is a forgivable loan issued by the Small Business Administration. Only small businesses with less than 300 employees who experienced a 25% decrease in gross receipts for specific quarters are eligible. Both the first and second draw offered three times the average monthly payroll costs not to exceed $2 million.
The Employee Retention Credit is a fully refundable tax credit eligible employers claim against certain employment taxes. It is not a loan and does not have to be paid back. The credit is calculated based on 50% of wages up to $10,000 per employee. Small and large businesses (but not those self-employed) that experienced at least a 20% decrease in gross receipts in specific quarters are eligible.
Late Application for ERC
Many employers were unaware of the Employee Retention Credit or thought they weren't eligible because they had drawn PPP loans. They didn’t apply for ERC even though they had to stop work due to government orders or experienced a significant decline in revenue.
The IRS allows businesses to request the tax credits they're eligible for up to three years after the initial filing date or as late as 2024. That's great news for business owners who worry they may have missed the window.
Exact Payroll Can Help
We know the ERC is complicated; with the requirements changing halfway through the program, determining eligibility and calculating your tax credit can be challenging. Schedule an ERC consultation with Exact Payroll today to find out if you're eligible for up to $26,000 per employee in tax credits from the IRS.