The CARES Act: Payroll Implications for Small Employers

The recently-enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2 trillion stimulus package designed to help U.S. businesses and workers impacted by COVID-19.  Small employers are in for a treat, as the bill delivers massive payroll assistance — including paycheck protection loans, loan forgiveness, payroll tax credit, and Social Security tax deferral.

Paycheck protection loans

The CARES Act appropriates $349 billion in loans to small businesses. The loans are funneled through the Paycheck Protection Program (PPP), a new lending facility administered by the Small Business Administration (SBA).

How much can small businesses borrow?

You can borrow the lesser of $10 million or 250% of your business’ average monthly payroll costs during the prior 12 months. The loan covers 8 weeks of payroll costs and any additional covered debt payments. If you have seasonal employees, your average payroll costs are based on the 12-week period starting March 1, 2019 through June 30, 2019.

What can the money be used for?

Permitted uses:

• Compensation costs, including payments to employees and independent contractors, up to $100,000 per year per individual
• Group health benefits costs
• Paid vacation, family, and sick leave
• Cost of retirement benefits
• Mortgage or rent payments
• Utility payments
• Interest on mortgage and prior debt

Prohibited uses:

• Employee compensation over $100,000
• Compensation made to employees whose primary residence is outside the U.S.
• Paid family and sick leave for which a credit can be taken under the Families First Coronavirus Response Act

Who can get the loan?

Businesses with no more than 500 employees or those that meet the SBA’s size standard are eligible for the PPP loan. Food services businesses qualify, as well, so long as they don’t have more than 500 employees per location.

What are the repayment terms?

The maximum interest rate is 4% and repayment cannot exceed 10 years.

Loan payments are deferred for at least 6 months. Further, loan fees, collateral requirements, and personal guarantees are waived.

When and how can small businesses apply for a PPP loan?

The SBA has launched a PPP webpage, which includes instructions on how to apply for the loan. Some lenders began processing loan applications on April 3.

Along with telling you how to apply for the loan, the PPP webpage provides other loan details, such as eligibility and other types of available loans.

You have until June 30, 2020 to apply for a PPP loan.

Note that if you have an SBA COVID-19 disaster loan, you may be able to refinance your outstanding disaster loan through the PPP, up to the maximum PPP loan amount of $10 million.

Loan forgiveness

If certain conditions are met, you can obtain loan forgiveness up to the total spent on payroll, mortgage interest, rent, and utilities throughout the 8-week period following your loan origination date. The loan forgiveness amount cannot be more than the original principal.

What are the requirements for forgiveness?

Your loan will be forgiven only if it was used for the intended purpose (payroll, rent, etc.) and your average number of full-time employees has stayed the same from when you first received the loan. If your employee headcount drops, or your employee compensation declines 25% or more, then the loan forgiveness amount will be reduced. You can mitigate this risk by promptly replacing terminated employees.

If you use the loan funds as intended by law and maintain your employee headcount, you will need to pay only accumulated interest on the loan.

For the loan to be forgiven, you will need to show sufficient documentation, so make sure you develop and maintain proper recordkeeping procedures.

Payroll tax credit

Employers seriously impacted by the coronavirus — either due to a shut-down order or a 50% reduction in gross receipts — may qualify for a refundable payroll tax credit of 50%. The credit is applied to the first $10,000 of each employee’s compensation, including health benefits, from March 13, 2020 through Dec. 31, 2020.

Can an employer get a PPP loan and the payroll tax credit?

No. But if your payroll tax credit will be more than your forgivable PPP loan amount, then it makes sense to go with the payroll tax credit.

Social Security tax deferral

Employers are required to withhold Social Security tax at 6.2% from their employees’ wages, up to the annual wage limit ($137,700 for 2020). In addition, they must pay their own share of Social Security tax at the same rate as employees. Usually, employers must submit their share of Social Security tax plus their employees’ portion to the IRS either monthly or semiweekly.

Under the CARES Act, employers can defer paying their share of Social Security tax; 50% of the deferred amount must be paid by Dec. 31, 2021 and the remaining 50% is due by Dec. 31, 2022.

Social Security tax for employees and self-employed individuals must be paid as normal.

The deferral does not pertain to Medicare tax.

Failure to pay employment taxes can result in civil and criminal penalties, so make sure you weigh all angles before delaying your share of Social Security tax.