The impact of the COVID-19 national emergency has had a seismic impact on businesses, individuals and the overall economy. According to the U.S. Department of Labor, over the last three weeks, there have been 16.8M unemployment claims with 6.6M being field over the last seven days. The confluence of forced business closures and stay at home orders have diminished demand for products and services rendering many helpless and unable to retain employees. When combined with fixed expenses and other obligations there is a dire need to find new sources of funding. In response, Congress passed the CARES Act which created important new loan options including the Payroll Protection Program (PPP). The program provides 100% forgivable loans for businesses to manage payroll expenses and retain staff. While much has been published, there is still a great deal of confusion surrounding various aspects of the program. On April 8, 2020, the SBA published a list of FAQs to resolve the confusion. To help clients, prospects, and others, Hanson & Co has highlighted important information 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, payments of employee benefits consisting of group health care coverage, and payment of state and local taxes assessed on 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 otherwise allowed such as paid sick leave and expanded family and medical leave available through the Families First Coronavirus Relief Act (FFCRA).
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 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 or other payroll providers. In these cases, payroll documentation provided by the payroll provider 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. It’s important to note, employees of the borrower will not be considered employees of the borrower’s payroll provider or PEO.
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).
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? Answer: No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s 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.
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 (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of the 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.
The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?
The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
As the COVID-19 emergency continues many Denver businesses will continue to struggle. As a result, the opportunity presented by the Paycheck Protection Program is one that should not be missed. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us.