June 17, 2020

This paid piece is sponsored by Eide Bailly LLP.

The COVID-19 pandemic has brought many changes and regulations for individuals and business owners alike. New legislation, tax laws and other implications are getting approved seemingly every day to help businesses and their employees survive during this time.

The provisions in the CARES Act, which include the Paycheck Protection Program, Payroll Tax Deferral and the Employee Retention Credit, have been beneficial to businesses. However, it also is important to take a look at how these programs and provisions impact an organization’s payroll.

Payroll Tax Deferral

As one of the tax provisions included in the CARES Act designed to provide liquidity for businesses suffering from the COVID-19 pandemic, the Payroll Tax Deferral postpones the employer’s portion of certain payroll taxes incurred in 2020.

The taxes will be paid back in two installments:

• Half due Dec. 31, 2021.
• Half due Dec. 31, 2022.

What payroll taxes can be postponed?

Generally speaking, the payroll taxes that can be postponed into the next two years include:

• The employer’s share of Social Security taxes — the 6.2 percent employer portion up to the wage base amount of $137,700 in 2020.
• The employer’s and employee representative’s share of the Tier 1 Railroad Retirement Tax Act tax — equivalent to the 6.2 percent Social Security rate.
• The equivalent amount of self-employment tax for individuals with income from self-employment — 50 percent of the 12.4 percent self-employment tax, which is equal to the 6.2 percent Social Security rate.

Taxes that were due to be submitted March 27, 2020, or later are eligible for deferral, and there is no maximum amount of qualifying payroll taxes that can be deferred.

The CARES Payroll Tax Deferral does not include an employer’s portion of Medicare taxes or any amounts withheld from employees, including income tax withholdings and employee share of Medicare and Social Security. Payroll tax amounts that have been reduced by credits for qualified family and medical leave wages or the Employee Retention Credit are not eligible for deferral.

Who can’t defer payroll taxes?

Employers that have had debt forgiven under the Small Business Administration’s PPP or the U.S. Treasury Program Management Authority are not eligible for the Payroll Tax Deferral. However, this doesn’t exclude employers who have applied for and received PPP funds from being able to defer the employer’s portion of Social Security. Payroll taxes can be deferred until the point they receive a decision that their PPP loan is forgiven. At this point, the employer is no longer able to defer any additional payroll taxes, and the taxes that were deferred up until that time will be due on the installment dates.

Are third-party agents responsible for the deferred payments?

The CARES Act provides special rules for situations in which an employer uses a third-party agent or certified professional employer organization, or CPEO, to handle payroll. In cases like this, the employer is responsible for ensuring the deferred amounts are paid by the respective due dates. It is not the responsibility of the third-party agent or the CPEO.

How does an employer properly reconcile payroll with postponed payroll tax payments?

You will want to reconcile your payroll with each payroll process:

1. Track the total amount of employer Social Security.
2. In another column, document the amount deferred. This will help with tracking the amount that will be owed back. 

Payroll and the Paycheck Protection Program 

The Paycheck Protection Program, or PPP, provides funds that must be mainly used toward payroll costs. Tracking and documentation of this is critical, especially as it relates to potential loan forgiveness.

Ensure you:

• Identify any employees who are receiving less than 25 percent of their gross wages or normal hours.
• Supply all necessary tax forms and payroll reports to determine payroll costs.
• Identify any employees who fall over the $100,000 wage limit, as this will not qualify for PPP funding. Calculate the maximum per person during your eight weeks when over $100,000. Take the $100,000 and divide it by 52 weeks, and then multiply by eight weeks. The resulting $15,384.62 is the maximum you can claim for one person.
• Monitor and document full-time employee counts during the time frame indicated in the PPP loan.
• Take a look at Payroll Tax Deferral options. Payroll taxes are able to be deferred from March 27, 2020, through the date of the loan forgiveness.
• If you are paying employees under the Families First Act, you may want to consider using the amounts for the PPP loan forgiveness and not applying the tax credit. If those wages aren’t needed for PPP forgiveness, the tax credit can be taken at a later date.

As a reminder, you can’t take the Employee Retention Credit if you elected to take the PPP funding.

 Payroll and the Employee Retention Credit 

The Employee Retention Credit, or ERC, is a fully refundable tax credit for employers equal to 50 percent of qualified wages, including allocable qualified health plan expenses that  eligible employers pay their employees. The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021.

How it works

1. First, you will need to determine if you are an eligible employer. An eligible employer experienced one of the following:
   • Experienced significant decline in gross receipts during a quarter of 2020 when compared to that same quarter in 2019. A significant decline in gross receipts is defined as being less than 50 percent.
   • Was required by the government to partially or fully suspend trade or business during a calendar quarter because of the COVID-19 pandemic.
2. Understand what qualifies as wages:
3. • If an employer had more than 100 full-time employees in 2019, qualified wages are those paid to an employee for the time period the employee is not providing services.
   • If the employer was below 100 full-time employees in 2019, qualified wages are then the wages paid to any employee during any such period of economic hardship. Qualified wages also include expenses related to health plans that are properly allocated over the wages.

Relief provisions, including the CARES Act and the programs within it, contain elements that impact an organization’s payroll process. Knowing and understanding the impact of these acts will be crucial in making sure you have proper records and documentation.

While these acts have many pieces and may seem complicated, they don’t have to be. Reach out to an Eide Bailly professional, and visit Eide Bailly’s COVID-19 webpage, which is full of resources to help you and your business navigate these uncharted waters. Eide Bailly is here to help your organization stay on track and keep your employees safe during the COVID-19 pandemic.