During the COVID-19 pandemic, the government introduced multiple relief programs to support businesses, with two of the most notable being the Employee Retention Credits (ERC) and the Paycheck Protection Program (PPP) loans. While both aimed to help employers keep their staff and maintain operations, they work very differently. Understanding the differences between Employee Retention Credits and PPP loans can help you make better financial decisions and maximize available benefits.
Overview of Employee Retention Credits
Employee Retention Credits are a refundable payroll tax credit designed to reward businesses for retaining employees during eligible periods in 2020 and 2021. Once approved, the IRS issues a direct cash refund—no repayment required. The amount is based on qualifying wages and health plan expenses, potentially reaching up to $26,000 per employee across all eligible quarters.
Overview of PPP Loans
The PPP loan program provided forgivable loans to help small and mid-sized businesses cover payroll and other approved expenses during the pandemic. Businesses could apply through approved lenders, and if they used the funds according to the program’s rules—primarily for payroll, rent, and utilities—the loan could be fully forgiven.
Key Differences Between Employee Retention Credits and PPP Loans
1. Type of Funding
- Employee Retention Credits: Refundable tax credit; money received is yours to keep without repayment.
- PPP Loans: Initially a loan; can be forgiven if specific requirements are met.
2. Eligibility Criteria
- ERC: Based on a significant revenue decline or partial/full suspension of operations due to government orders.
- PPP: Based on business size, payroll costs, and impact from COVID-19, without the same specific revenue drop requirement.
3. Use of Funds
- ERC: No restrictions; once the refund is issued, you can use it for any business purpose.
- PPP: Funds had to be spent primarily on payroll (at least 60%) and other approved expenses to qualify for forgiveness.
4. Application Process
- ERC: Claimed by amending payroll tax filings (Form 941-X) for eligible quarters.
- PPP: Applied through a bank or approved lender, with a separate forgiveness application after use.
5. Timing of Benefits
- ERC: Refund is issued after IRS processing, which can take months.
- PPP: Loan funds were disbursed quickly—often within weeks of approval.
Can You Benefit From Both Programs?
Yes. Many businesses took advantage of both Employee Retention Credits and PPP loans, but you cannot use the same wages for both benefits. Careful wage allocation is necessary to maximize total relief. A qualified tax professional can help navigate the rules to ensure compliance while securing the highest possible benefit from both programs.
Common Misconceptions
- Myth: If you received PPP, you can’t claim ERC.
Truth: You can claim both, just not on the same payroll dollars. - Myth: ERC is a loan like PPP.
Truth: ERC is a refund—no repayment, interest, or restrictions.
Why Employee Retention Credits Can Be More Valuable
While PPP provided quick access to funds during the height of the crisis, Employee Retention Credits can result in larger total benefits, especially for businesses with many qualifying employees. Since ERC is not limited to specific expense categories, it offers greater flexibility and long-term value.
Conclusion
Employee Retention Credits and PPP loans both played crucial roles in helping businesses survive the pandemic, but they operate in fundamentally different ways. Understanding these differences—and knowing how they can work together—can help you maximize your financial recovery. If you received PPP loans but haven’t explored ERC yet, you could still be eligible for substantial refunds. Reviewing your eligibility now could uncover a hidden opportunity for your business.
