Employee Retention Credit vs PPP Loans – Can you qualify for both?

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Page written by Michael David. Last reviewed on February 14, 2024. Next review due October 1, 2025.

The Paycheck Protection Program provided loans to small businesses during COVID-19 that could be applied to things like payroll, rent, and utilities. The best part? The loans are forgivable in many cases. Here’s the deal.

When the Employee Retention Credit (ERC) and Paycheck Protection Programs (PPP) were initially introduced, businesses were generally not allowed to claim both the ERC and PPP loans for the same wages.

Today, businesses that received a PPP loan can potentially use both the ERC and PPP, but not for the same wages. Specifically, if wages were used to obtain forgiveness of a PPP loan, those same wages could not be used for the ERC.

Employers must carefully analyze which wages are being used for PPP loan forgiveness and which may be eligible for the ERC. This may involve strategic planning to maximize the benefits of both programs.

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What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a U.S. government initiative that was created to provide financial assistance to small businesses during the economic challenges brought about by the COVID-19 pandemic. The PPP was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020. It has since been extended and modified through subsequent legislative acts.

The primary goal of the PPP is to help small businesses keep their workforce employed during the economic uncertainty caused by the pandemic. It provides funds to cover payroll costs and other essential operating expenses.

PPP loans are designed to be forgivable if the funds are used for eligible expenses, which primarily includes payroll costs, rent, utilities, and mortgage interest. To qualify for full loan forgiveness, businesses must use at least 60% of the loan amount for payroll costs.

Eligible borrowers include small businesses, nonprofits, sole proprietors, independent contractors, and certain self-employed individuals. The maximum loan amount is generally based on a multiple of the borrower’s average monthly payroll costs with a cap of $10 million for an individual borrower.

What is Employee Retention Credit?

The Employee Retention Credit (ERC) is also sometimes referred to as the Employee Retention Tax Credit or ERTC. It is a refundable tax credit for businesses and tax-exempt organizations that had employees during the COVID-19 pandemic.

The goal of the ERC is to help employers who experienced either a suspension of operations due to a government order or a significant decline in gross receipts in 2020 or the first three quarters of 2021. There’s also a provision for companies that meet the specific criteria for a recovery startup business.

To claim the ERC, eligible employers can file an amended employment tax return.

Key differences between PPP and ERC

The Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) were both created to support businesses during the economic challenges of the pandemic, but they have several key differences:

Purpose. The primary purpose of the PPP is to provide forgivable loans to businesses, with an emphasis on maintaining payroll and keeping employees on the payroll. The ERC, on the other hand, is a tax credit designed to encourage businesses to retain employees by providing a credit against payroll taxes. It is not a loan, and businesses can receive a credit for qualified wages paid to eligible employees.
Financial assistance. The PPP provides forgivable loans that, if used for eligible expenses, may be fully forgiven. The forgiveness is contingent on meeting certain criteria, primarily related to maintaining employee headcount and salary levels. In contrast, the ERC offers a tax credit against payroll taxes for qualified wages paid to eligible employees. The credit is not dependent on loan forgiveness and does not require repayment.
Eligibility. PPP eligibility is based on factors such as the size of the business, type of business, and meeting certain employee retention criteria. ERC eligibility is determined by criteria such as a significant decline in gross receipts or a government-mandated suspension of operations.
Use of funds. With the PPP, funds can be used for eligible expenses, with a focus on payroll costs. At least 60% of the loan must be used for payroll costs to qualify for full loan forgiveness. The ERC is based on qualified wages, which include wages paid during periods of significant decline in gross receipts or government-mandated suspension. Health plan expenses may also be included.

Funding types

The Paycheck Protection Program (PPP) primarily offered two types of funding, commonly referred to as the “First Draw” and “Second Draw” loans. Here is how they worked:

First Draw PPP Loans. The loan amount for First Draw PPP loans was generally calculated based on 2.5 times the average monthly payroll costs, up to a maximum loan amount. The maximum loan amount for an individual borrower was capped at $10 million. The funds from First Draw PPP loans could be used for eligible expenses, with at least 60% of the loan amount required to be used for payroll costs to qualify for full loan forgiveness.
Second Draw PPP Loans. The Second Draw PPP loans were introduced to provide additional support to businesses that had already received a First Draw PPP loan. Eligibility included having 300 or fewer employees, experiencing a 25% or more reduction in gross receipts in a specific quarter of 2020 compared to the same quarter in 2019, and having spent or plans to spend the full amount of the First Draw PPP loan. The loan amount for Second Draw PPP loans was generally calculated based on 2.5 times the average monthly payroll costs to a maximum of $2 million. Similar to the First Draw PPP loans, at least 60% of the Second Draw PPP loan funds were required to be used for payroll costs to qualify for full loan forgiveness.

Both First Draw and Second Draw PPP loans had the potential for full loan forgiveness if the funds were used for eligible expenses and met certain criteria.

Funding time

The time it takes to receive funding through the Paycheck Protection Program (PPP) can vary based on several factors, including the lender’s processing speed, the completeness of the application, and the demand for PPP funds at the time of application.

Cost of loans

PPP loans have a low-interest rate, generally set at 1%. This low rate was designed to make the loans more accessible and affordable for businesses. However, one of the key features of PPP is the potential for loan forgiveness. If you use the funds for eligible expenses and meet certain criteria, the loan may be fully forgiven, effectively turning it into a no-cost grant.

Eligibility criteria

First Draw and Second Draw PPP loans each had their own eligibility criteria as follows:

First Draw PPP Loan eligibility. Businesses must meet the definition of a small business concern as defined by the Small Business Act. Generally, this means 500 or fewer employees. Eligible entities include small businesses, sole proprietors, independent contractors, self-employed individuals, nonprofits, veterans’ organizations, tribal concerns, housing cooperatives, certain 501(c)(6) organizations, and small agricultural cooperatives. Businesses had to be in operation on February 15, 2020, had employees for whom they paid salaries and payroll taxes or paid independent contractors, and had to certify that they were under financial strain due to COVID-19.
Second Draw PPP Loan eligibility. Businesses must have previously received a First Draw PPP Loan and have used or will use the full amount for authorized uses. Businesses must demonstrate at least a 25% reduction in gross receipts in a 2020 quarter compared to the same quarter in 2019.

Can you Get Employee Retention Credit and PPP?

Yes, it may be possible to claim both as long as you do not count the same wages twice. In other words, you could not use the same wages to count as “qualifying wages” to receive both a refundable tax credit through the ERC, and also for loan forgiveness through the PPP.

Application process for PPP and ERC

Here are the general steps to apply for a PPP loan:

Contact a lender. PPP loans were administered through participating lenders, including banks, credit unions, and online lenders.
Gather documentation. Payroll records, tax forms, and other financial documents are needed to support your eligibility and loan amount calculations.
Complete the application. The application form will vary by lender, but it generally includes information about the business, its ownership, payroll costs, and other relevant details.

The lender is responsible for reviewing the application and determining loan approval. After using the funds for eligible expenses, it is possible to apply for loan forgiveness. The forgiveness application typically requires documentation showing how the funds were spent during the covered period.

Now here’s a general overview of the ERC application process:

Determine eligibility. Eligibility is based on factors such as a significant decline in gross receipts or a full or partial suspension of business operations due to government orders.
Calculate qualified wages. The calculation depends on the size of the employer and the amount and period in which the wages were paid.

Collect documentation. This may include payroll records, financial statements, government orders that led to a suspension of operations, and other relevant documentation.
File IRS forms. Report the qualified wages, calculate the credit, and offset the credit against the employer’s share of Social Security taxes. Any excess credit can be claimed as a refund. If you did not do this while the program was active using Form 941, you may be able to do it retroactively using Form 941-X.

How to maximize the benefits of both PPP and ERC for your business

Wages used for PPP loan forgiveness are generally not eligible for the ERC, so it’s important to determine the best way to allocate wages to each program in order to maximize the benefits. Here are some tips:

Run the numbers. Assess the financial impact of utilizing both programs. Estimate the expected ERC available and the potential for loan forgiveness under PPP.
Use PPP for non-payroll expenses. PPP funds can be used for a broader range of expenses, including rent, utilities, and mortgage interest. Consider using the PPP for these non-payroll expenses and allocating more of your wages to the ERC.
Optimize employee retention. Strive to meet the criteria for full PPP loan forgiveness and maximize the ERC benefits by retaining employees. You could explore employee retention strategies, such as offering bonuses or other benefits, as long as they are within the guidelines of both programs.
Consult with advisors as needed. Seek advice from financial and tax advisors who can provide guidance based on the specific circumstances of your business. Professionals with expertise in tax law and small business assistance can help navigate complex rules.

How Swoop can help

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Written by

Michael David

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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