Employee Retention Credit vs. Other Government Stimulus Programs: A Comparative Analysis

The COVID-19 pandemic resulted in massive economic disruption for businesses across industries. To provide relief, the government implemented several stimulus programs to help companies retain employees and stay afloat during an incredibly challenging time. One of the keyprograms is the Employee Retention Credit (ERC), which gives tax credits to eligible employers based on wages paid to employees.

However, the ERC is not the only choice -other major efforts like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) also exist. Here, we compare the Employee RetentionCredit to these additional government stimulus packages. We analyze core similarities and differences regarding eligibility criteria,calculation/claiming processes, flexibility, and more. Our aim is to equip businesses with the information to decide which program(s) suit their distinctsituation.

Overview of the Employee Retention Credit

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit in March 2020. Itwas later expanded and extended by the Consolidated Appropriations Act of 2021.The ERC aims to incentivize employers to keep employees on payroll. Eligible companies can get a tax credit equal to 50% of qualified wages paid to employees during an eligible quarter.

The maximum ERC amount in 2020 was $5,000per employee for the full year. It increased to $7,000 per employee per quarter in 2021. The credit can be taken against the employer’s share of SocialSecurity tax, with any excess refunded by the IRS. This provides immediate payroll tax relief versus waiting until filing tax returns.

Below we summarize key details of the Employee Retention Credit:

Eligibility Criteria

• Private employers, tax-exempt organizations, tribal businesses
• Operations fully or partially suspended due to government orders or significant revenue declines in 2020/2021

Calculation

• 50% of qualified wages paid to employees during eligible quarters
• Maximum of $5,000 per employee for 2020, $7,000 per employee per quarter in 2021

Claiming Process

• Credit taken against employer’s share of Social Security tax
• Excess refunded by IRS

Benefits

• Immediate payroll tax relief
• Incentive to retain employees during COVID-19

Limitations

• Can’t be combined with PPP loan forgiveness for same wages
• Complex eligibility criteria

While the ERC provides substantial benefits, it also has key differences from other government stimulus programs.Below we compare it to the Paycheck Protection Program, EIDL loans, SBA debt relief, and more.

Paycheck Protection Program vs. Employee Retention Credit

The Paycheck Protection Program (PPP)provided potentially forgivable loans to support small businesses retaining employees. Over $800 billion was loaned across two funding rounds in 2020 and early 2021.

Eligibility Criteria

The PPP targeted small businesses in most industries broadly, while the ERC focuses on employers impacted by full/partial suspensions or revenue declines.

‍PPP                                                                        

Business Size <500 employees                                     

Industry Most                                                                  

Impact of COVID-19 Not required            

‍Employee Retention Credit

No limits

Most

Required

Loan/Credit Amounts

PPP loans were sized based on historical payroll costs, while the ERC depends on qualified wages paid in eligible quarters.

‍PPP  

‍Basis for Amount 2.5x average monthly  2019/2020 payroll up to $10 million                 

Maximum Amount $10 million across two loans                                          ‍

Employee Retention Credit

50% of qualified wages paid in eligible  quarters

 $5,000 per employee in 2020 

$7,000 per employee per quarter in 2021

Application and Forgiveness/Claiming

Employers apply through SBA lenders for PPP loans and request forgiveness later based on spending requirements. The ERCis claimed against payroll taxes without a separate application.

PPP                                                                                                                

Application Process Through banks/lenders   

Basis for Forgiveness60%+ spent on payroll costs                           

‍Employee Retention Credit

Against payroll taxes

Credit taken against taxes

Combining Programs

Wages used for PPP loan forgiveness can't also support ERC credits to prevent “double-dipping”. The programs aregenerally mutually exclusive.

‍PPP                                                                                                            

Combine with ERC? No - wages can't overlap                       

Employee Retention Credit

No - wages can't overlap

So in summary, while both programs support employee retention, the PPP targeted more industries broadly whereas ERC eligibility requires COVID-19 impact. The application process also differssubstantially.

Economic Injury Disaster Loan vs. Employee Retention Credit

The SBA’s Economic Injury Disaster Loan(EIDL) program predates COVID-19 but expanded to provide low-interest loans of up to $2 million to affected small businesses.

Eligibility Criteria

EIDL eligibility is broader than the ERC,not requiring specific COVID-19 impacts. Loan amounts are also based on working capital needs rather than employee wages.

‍EIDL                                                                                                           

Business Size <500 employees                                                  

Industry Most                                                                                 

Impact of COVID-19 Not required                                                 

Employee Retention Credit

No limits

Most

Required

Application and Repayment

EIDLs require a full loan application and repayment over time, while the ERC is embedded into the payroll tax process.

EIDL                                                                                                        

Application Process Directly via SBA                                      

Terms Working capital, 30 year repayment                            

Employee Retention Credit

Against payroll taxes

Credit against taxes owed

So the EIDL program differs from the ERC primarily through its broader eligibility criteria, loan-based structure, and repayment requirements.

‍SBA Debt Relief vs. Employee Retention Credit

The SBA also introduced debt relief by covering principal, interest and fee payments on some existing SBA loans for several months during 2020 and into 2021.

Eligibility Criteria

This relief applied only to existing SBA borrowers, while the ERC focuses specifically on employers retaining workers.

SBA Debt Relief                                                                               

Business Size Existing SBA borrowers                                     

Industry Most                                                                             

Employee Retention Credit

No limits

Most

‍Application and Forgiveness

Debt relief was automatically applied to existing SBA loans for those that qualified, requiring no application. The ERC again contrasts as a credit against payroll taxes.

SBA Debt Relief                                                                                                             

Application Process Automatic based on  existing SBA loans                    

Basis for Relief Principal, interest, and  fee payments suspended             

Employee Retention Credit

Against payroll taxes

Credit against taxes owed

So SBA debt relief differs as it targeted existing SBA borrowers specifically, with no application needed to receive benefits.

Work Opportunity Tax Credit vs. Employee Retention Credit

The Work Opportunity Tax Credit (WOTC) provides incentives for employers to hire workers from certain target groups like veterans and those on government assistance.

Eligibility Criteria

The WOTC focuses narrowly on adding and retaining employees from the designated groups, contrasting with the ERC’s broad eligibility for impacted employers.

‍WOTC                                                                                                                  

Target Employee Groups Veterans, SNAP  recipients,

ex-felons, those unemployed for 27+ weeks, etc.                             

Industry Most                                                                                         

Employee Retention Credit

Broad eligibility

Most

‍Calculation and Claiming

The WOTC amount depends on target employee wages and can be claimed across multiple years. The ERC depends ontotal qualified wages aggregated quarterly in 2020/2021.

WOTC                                                                                                                   

Credit Amount % of employee wages from

target groups, up to $9,600 over two years                                     

Duration Can claim over two years                                                    

Employee Retention Credit

50% of qualified wages paid in quarter

Quarters in 2020 and 2021 only

The WOTC has more narrow eligibility requirements related to hiring specific employee populations, contrasting withthe broad nature of the pandemic ERC.

Comparative Analysis

Now that we’ve covered the key governments timulus programs, we can analyze how the Employee Retention Credit comparesand contrasts across some major categories:

Key Similarities

• Support for Small and Medium-sized Businesses- All the programs we discussed were implemented with small and midsizedbusinesses in mind, not only mega corporations. The PPP loans and EIDL loans especially targeted this segment.
• Incentives for Employee Retention- Keeping workers paid and employed was a shared objective across the stimulus measures from the ERC to PPP. This provided relief for businesses and employees alike.
• Government Assistance in Times of Crisis- The programs emerged to provide unprecedented government support when COVID-19 hit the economydevastatingly. They demonstrated the role stimulus can play for stabilization.

Key Differences

• Eligibility Criteria and Targeted Industries- While the ERC, PPP, and EIDL loans supported small businesses broadly, the ERC uniquely required specific COVID-19 impacts to qualify. Programs like debt relief and WOTC also targeted narrower segments than the wide eligibility for the ERC.
• Calculation and Claiming Processes- The direct loans of the PPP and EIDL programs differ drastically from the tax credit process of the ERC. Some initiatives like debt relief also had benefits automatically applied rather than requiring applications.
• Flexibility and Usage Restrictions- The ERC’s usage is restricted in terms of combining with PPP loan forgiveness for the same wages. EIDL loans offer more flexibility as working capital with a multi-decade repayment term.
• Duration and Program Expiration- While the ERC and PPP expired in 2021, businesses still have years to claim and apply credits. EIDL loans and SBA debt relief likely have longer-term implications for recipients based on repayment schedules.

Conclusion

The COVID-19 pandemic prompted a suite of government stimulus measures to provide relief for struggling businesses and incentivize employee retention. While programs like the Paycheck ProtectionProgram and EIDL loans provided a lifeline for many companies, the Employee Retention Credit offered targeted help for employers impacted by suspensions orrevenue declines. Each program came with its own distinct eligibility criteria,calculation methodologies, application processes, and duration considerations. Small and medium businesses needed to weigh options given restrictions aroundcombining some programs like the PPP and ERC. Even with the programs nowexpired, businesses have years still to claim credits and forgiveness. Thestimulus packages were unprecedented in speed, size, and scope - demonstratinghow governments can step in to stabilize economies during major crises. Thelegacy of programs like the ERC and PPP will have long-lasting implications onthe small business landscape across America.

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