How is the ERC Different from PPP Loans?

The COVID-19 pandemic inflicted significant financial hardships on businesses across the nation. In response to these challenges, the US government introduced relief programs to aid businesses, including the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). These programs aim to provide financial assistance to businesses and help with employee retention. While PPP offered potentially forgivable loans, the ERC offers a tax refund that does not need to be repaid.
In this blog post, we will explore and compare the distinctions between PPP and ERC. However, let's begin by gaining a comprehensive understanding of each program separately.

Paycheck Protection Program (PPP)

The PPP, established under the Coronavirus Aid Relief and Economic Security (CARES) Act and managed by the United States Small Business Administration (SBA), provided loans with a maximum limit of $10 million. Although the program concluded in May 2021, businesses can still apply for loan forgiveness until the loan's maturity date, which is typically two or five years from loan origination. To qualify for loan forgiveness, borrowers must meet the following criteria, according to the SBA:

1. The loan funds were utilized for payroll costs and associated expenses.
2. Employee count and compensation levels were maintained.
3. At least 60% of the funds were allocated to payroll costs.

Employee Retention Credit (ERC)

The ERC, like PPP, was also established under the CARES Act but is managed by the Internal Revenue Service (IRS). It is a refund provided to businesses based on the wages paid to employees during 2020 and 2021. The last date for submissions under this program is April 15, 2025. 

The ERC is issued as a mailed check directly from the IRS. This credit provides businesses with a refund of up to $26,000 per W-2 employee retained during the pandemic. Businesses across sizes and industries, including startups, nonprofits, corporations, LLCs, and small businesses, may qualify for the ERC. The qualification criteria for the ERC tax credit differ between 2020 and 2021 but primarily include two key factors:

1. The business must have employed below a certain threshold of full-time employees.
2. The business must have experienced either a government-mandated operational disruption or a significant loss of income during the pandemic.

Learn more about the ERC here. Or read this blog post - Is My Restaurant Eligible for the Employee Retention Credit?, to learn more about the ERC eligibility criteria.  

Key Differences between PPP and ERC

The Payment Protection Program (PPP) and the Employee Retention Credit (ERC) provide assistance to employers, but they have distinct differences. Let's explore and clarify these factors.

Type of Funding

PPP provided first and second-draw forgivable loans, aiding businesses in retaining their workforce throughout the pandemic. These loans had a 1% interest rate and repayment terms of two or five years. In contrast, the ERC is a non-repayable tax credit that results in a refund issued as a check mailed by the IRS.

Claim Amount

If you met the eligibility criteria, you could have been eligible for a PPP loan amounting to approximately 2.5 times your average monthly payroll costs. In the case of the ERC tax credit, you can claim up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021, totaling up to $21,000. This means you have the potential to receive up to $26,000 in tax credits through the ERC.

Usage Restrictions 

The funds from a PPP had specific usage requirements for payroll, rent, utilities, mortgage interest, and qualifying expenses. However, ERC refunds have no usage restrictions, granting businesses the freedom to utilize the refund as they wish. Whether it's investing in their business, getting new office space, or even taking a vacation, business owners have full control over their ERC funds.

Qualifying Criteria for Businesses 

PPP eligibility encompassed small businesses, startups, nonprofits, and veteran organizations, with employee limits of 500 or fewer, depending on the year and loan type, whether first or second-draw.

ERC eligibility covers small businesses, startups, nonprofits, corporations, and LLCs. For 2020, businesses must have had 100 or fewer employees in 2019, and for 2021, the limit is 500 or fewer employees in 2019. Even if a business surpasses the employee threshold, eligibility can still be based on the headcount in 2019.

Refund Processing Time

If you qualified for the PPP loan as a business owner, you could expect to receive funding through direct deposit within ten days of approval. On the other hand, the ERC refund is processed after filing the 941-X form. The tax credit is issued as a check via mail within six to nine months after filing (due to government backlog). It is crucial to file your claim promptly to avoid missing out on the 2020 tax credit refund, as the deadline for such refunds is April 15, 2024. However, you can still file for 2021 refunds until April 15, 2025. Omega strongly advises timely filing to maximize your potential tax credit benefits.

Can I Receive Both PPP and ERC?

Businesses that have previously obtained PPP loans can still be eligible for an ERC tax refund. Although the PPP loan program has now come to an end, businesses that participated in the program can still qualify for an ERC tax refund. 

It’s not too late to apply for an ERC refund. Omega, as an expert in government tax incentives, has assisted numerous clients in claiming ERC refunds.

Contact Omega to get a free ERC consultation now!