April 8, 2020
The impact of the COVID-19 emergency has had a widespread impact on individuals, families, and businesses. The implementation of forced business closures and shelter in place orders have left many businesses facing surreal challenges. With limited or no opportunity to generate revenue, some have been forced to terminate or furlough employees leaving many without jobs and needed income. To help Congress initiated the Paycheck Protection Program (PPP) a forgivable loan available to businesses to support employee compensation and payroll expenses. The quick rollout of the program has created some issues and confusion leaving many Atlanta business owners with important questions. Although Treasury has issued interim final guidance, there are still questions about loan and employee calculations and the need for application resubmission. To help clients, prospects, and others, Wilson Lewis has highlighted key questions below.
The CARES Act excludes from the definition of payroll costs any employee compensation in excess of an annual salary of $100,000. Does that exclusion apply to all employee benefits of monetary value?
No. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans, payment of benefits including health care coverage and payment of state and local taxes on employee compensation.
Do PPP loans cover paid sick leave?
Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed.
What if an eligible borrower contracts with a third-party payer such as a payroll provider or a Professional Employer Organization (PEO) to process payroll and report payroll taxes?
The Small Business Administration (SBA) recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wages and other data on the Employer Identification Number (EIN) of the PEO. In these cases, the documentation provided by the payroll company that indicates the number of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.
Should payments that an eligible borrower made to an independent contractor or sole proprietor be included in calculations of the eligible borrower’s payroll costs?
No. Any amounts that a borrower has paid to an independent contractor or sole proprietor should be excluded from business payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.
What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?
In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from the calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019, to June 30, 2019, may use the average monthly payroll costs for the period January 1, 2020, through February 29, 2020. Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational if it has not been operational for 12 months).
How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?
Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA). As a result, payroll costs are not reduced by taxes imposed on an employee and are required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.
For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs.
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While the application process for the PPP has faced some initial challenges, it appears many issues have been resolved. To take advantage of the program it’s important to initiate your application process because funds are awarded on a first-come first-serve basis. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to assisting you during this challenging time.