Two of the most sought-after forms of coronavirus relief for employers are Paycheck Protection Program (PPP) loans and the Employee Retention Credit. Unfortunately, you can’t take advantage of both.

So, when it comes to a PPP loan vs. Employee Retention Credit, which should you choose?

Get the facts about both types of relief measures so you can make an informed decision and choose the one that best suits your small business. 

PPP loan vs. Employee Retention Credit 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established both the Paycheck Protection Program and Employee Retention Credit. 

Both relief measures encourage employers to keep employees on their payroll. They essentially provide employers with funds to cover payroll costs. One comes in the form of an SBA-guaranteed loan and the other in the form of a payroll tax credit. 

Compare your options below.

What are they?

Paycheck Protection Program: The PPP is a forgivable loan employers can apply for through an approved lender to help cover payroll costs (wages up to $100,000, employee benefits, and state and local taxes). Employers can also use some of the funds (25%) to cover interest on mortgages, rent, and utilities. 

Employee Retention Credit: The credit is a refundable payroll tax credit employers can claim on their federal employment tax return to cover employee wages and qualified health plan expenses associated with those wages. 

Am I eligible? 

Paycheck Protection Program: All small businesses with 500 or fewer employees and some businesses in certain industries with more than 500 employees can apply for a PPP loan. This includes self-employed individuals, independent contractors, sole proprietorships, nonprofits, veterans organizations, and tribal businesses. 

Employee Retention Credit: Employers of any size are eligible for the Employee Retention Credit if they meet the qualifications. But, self-employed individuals cannot claim the credit for their self-employment services or earnings. 

To qualify, you must have experienced either of the following in any calendar quarter in 2020:

What is the timeframe? 

Paycheck Protection Program: Small businesses and sole proprietorships can apply between April 3, 2020 – June 30, 2020. Independent contractors and self-employed individuals can apply between April 10, 2020 – June 30, 2020. Please note that funds are limited, and loans are based on a first-come, first-served basis. 

Employee Retention Credit: Employers can claim this payroll tax credit on qualifying wages paid between March 13, 2020 – December 31, 2020. 

How much could I receive? 

Paycheck Protection Program: Employers can receive a maximum loan of up to $10 million. Loan amounts are based on the employer’s average payroll costs over the past eight weeks, plus an additional 25%. 

Employee Retention Credit: Employers can receive a maximum credit of $5,000 per employee. Credits are worth 50% of qualifying wages and associated qualified health plan expenses paid to employees (up to $10,000 in wages per employee). 

Again, employer size doesn’t matter when it comes to Employee Retention Credit eligibility. However, your average number of full-time equivalent employees in 2019 determines qualifying wages. 

If you averaged fewer than 100 FTEs, your tax credit is based on wages paid to all employees during the period of suspended operations or gross receipts decline. If you averaged more than 100 FTEs in 2019, the tax credit is based on wages paid to employees who did not work during the period of suspended operations or gross receipts decline. 

How do I apply? 

Paycheck Protection Program: To apply for a PPP loan, fill out the application form and apply with an approved lender. You’ll also need additional documents, such as copies of your business’s employment tax form(s) from 2019 as well as both 2019 and 2020 payroll ledgers. 

Employee Retention Credit: You can immediately reduce liabilities owed for a tax by retaining contributions rather than depositing them with the IRS. Then, record or claim the credit on your federal employment tax return (e.g., Forms 941, 944, or 943).

What are my repayment responsibilities? 

Paycheck Protection Program: PPP loans are 100% forgivable on the principal amount if you use them for qualifying expenses and maintain your employee count and salary levels. If you use part of the loan for non-qualifying reasons, that portion is not forgivable. 

The PPP loan has a repayment plan of two years and a fixed interest rate of 1%. Payments are deferred for six months, but interest begins accruing immediately after taking out a loan. Again, the principal amount of the loan is eligible for forgiveness. 

Employee Retention Credit: You do not have to repay the Employee Retention Credit. 

However, if you receive an advance of the credits (using Form 7200), you’ll need to account for that amount when filing your federal employment tax return. 

What kind of recordkeeping do I need to do? 

Paycheck Protection Program: Request loan forgiveness through your lender after the eight-week loan period. You’ll need documents showing the number of full-time equivalent employees you have and pay rates, as well as mortgage, lease, and utility payments. 

Employee Retention Credit: Keep documents showing how you calculated the credit amount. Also retain documents that show that you had to suspend operations or experienced a decrease in gross receipts. If you applied for an advance, keep a copy of Form 7200 in your records, too. 

So, which should I choose?

Ultimately, the decision is yours. Calculate how much you could receive with both relief options to determine which is better for your business. 

Consider:

No double-dipping 

Although you can’t claim both the PPP loan and the Employee Retention Credit, you can claim either and the FFCRA paid leave credit. 

The paid leave tax credit was established under the Families First Coronavirus Response Act. It lets employers who are required to provide coronavirus paid leave receive a tax credit for the amount of the paid leave wages.

You can apply for the Paycheck Protection Program loan and claim the FFCRA paid leave credit. You can also claim both the Employee Retention Credit and the paid leave tax credit.

However, you cannot double-dip. 

If you choose to take the Employee Retention Credit and the paid leave credits, you can’t claim those credits on the same wages. Because you can only claim the paid leave credits on paid leave wages, you cannot claim the Employee Retention Credit on FFCRA paid leave wages.

And if you receive a Paycheck Protection Program loan and claim paid leave credits, the paid leave wages do not count as eligible “payroll costs” under the PPP’s loan forgiveness.  Because you claim the paid leave credit on FFCRA paid leave wages, do not count FFCRA paid leave wages as payroll costs when asking for PPP loan forgiveness.

The Paycheck Protection Program (often called the payroll protection program) is another avenue for small businesses to apply for SBA loans during the coronavirus outbreak. This is a separate program from the SBA disaster loans (EIDL), which you can read about on Heavy here. If you’re applying for a loan via the Paycheck Protection Program, read on for more details about when and how to apply, including a list of who some of the PPP lenders are with links for early applications.

Application Dates

Lenders begapn processing loan applications for small businesses and sole proprietors on Friday, April 3, according to the Treasury’s fact sheet.

If you’re an independent contractor or otherwise self-employed, applications began on April 10.

The deadline is June 30, Smart Asset reported. However, it’s better to apply as soon as possible because loans have a cap at $349 billion.

Apply Through SBA Lenders, Not the SBA’s Website

You can’t apply on the SBA’s website for this loan, unlike the disaster assistance loan. Instead you’ll apply through any SBA 7(a) lender or federally insured depository institution or credit union, among others.

The SBA’s fact sheet notes: “You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.”

As of the time of publication, the SBA did not have a list of vendors readily visible on its website. However, the SBA does provide a list of its most active SBA 7(a) lenders here, and these are among the lenders eligible to participate in the PPP. Below is the list of the SBA’s most active lenders, along with links where you can apply (or pre-apply), get more information or where applications will be posted once available. This is not a full list of lenders but a list of the most active, in alphabetical order. Please note that some of these businesses may not be ready to accept applications right on April 3, but they may include links for updates about when applications are available.

If you want to monitor any of these sites and get notifications when their webpages change, you can use a service like ChangeTower or Fluxguard.

According to the SBA, credit unions, S&Ls, banks and other lenders can join the 7(a) loan program if they meet certain requirements, which you can read here.

How To Apply

You can find a sample application form for the Payment Protection Program on the SBA’s site here. This is not an official application, which you have to get through a lender and not through the SBA. But this gives you an idea of what you’ll need to apply. It’s a three-page application that requires a few yes-or-no questions and certifications that the loan is necessary.

To apply, you’ll need to complete the PPP loan application and you’ll need payroll documentation. Some other lenders may require additional documentation. Trustmark, for example, requires 2019 End of Year Unemployment tax reports, IRS Form 940, organization documents (such as a certificate of existence), a list of entities owned by any 20% or more owner and they recommend including evidence of healthcare benefits paid to employees for 2019, evidence of retirement benefits paid and most recent tax returns.

You’ll need to know your average monthly payroll in order to apply. The SBA notes this is typically the average monthly payroll for 2019, excluding costs over $100,000 “on an annualized basis for each employee.” For seasonal businesses, you can use an average monthly payroll for February 15, 2019, to June 30, 2019. New businesses can use the time period from January 1, 2020, to February 29, 2020, with the same exclusion noted above.

According to the fact sheet, loans can be used for payroll costs (including benefits), interest on mortgage obligations before February 15, rent in force before February 15, and utilities whose service began before February 15.

Loans can be for up to two months of your average payroll costs from last year, plus 25 percent, up to $10 million. Loans must be used for payroll costs, mortgage interest, rent and utilities over an eight-week period from getting the loan in order to be forgiven. The SBA anticipated that no more than 25 percent of non-payroll costs will be forgiven.

Loan Alternatives

If you’re rejected for this loan, there are still many other options available. Your state might be offering loans for small businesses. You might also be able to apply for a disaster assistance loan through the SBA. The SBA is also offering Enhanced Debt Relief.

To learn more, contact us today!

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