SBA Paycheck Protection Program

The last couple of weeks here at Command Center have been … unprecedented.

We have sent employees home, although we have not let anyone go.

Critical personnel (including me somehow) are still coming in, although we are instituting a policy of one-person-in-the-office-at-a-time.  

I understand working at home, but a typical accounting firm is not geared to work from home indefinitely. For one thing, it takes administrative staff to keep the information and document flow going to the at-homers, and there is no administrative staff.

Fortunately, the IRS and many (if not most) states have acknowledged the reality of the situation and are allowing extensions of time to file and pay. There was probably no choice: preparers were not going to be able to get the work done anyway. It is likely that your return will be extended this year, even if you have never extended before.

Some of our clients have shut down. One, for example, works with product promotion at Kroger’s. Have you been to a Kroger’s recently? The last problem they have is moving merchandise.

Let’s talk about something. There is a brand-new SBA program for emergency funding. It may be that you have never considered government assistance before, but these are extreme times.

We are talking about the “Paycheck Protection Program.” Congress took an existing SBA loan program and sweetened the pot. Its purpose is – flat out – to encourage employers to retain employees and – if the employer has already furloughed employees -to hire them back.

Here are the general features of the program:

(1)  It expires June 30, 2020.

(2)  Think businesses with less 500 employees, but there are exceptions.

(3)  In a bit of a surprise for the SBA, the program includes nonprofits (again, with less than 500 employees)

(4)  The maximum loan amount is 2.5 times average payroll during the one-year period before the date the loan is made.

a.    With adjustments for new businesses, of course.

(5)  That maximum caps out at $10 million.

(6)  The loan is principally to fund payroll (with some limitations), but it will also cover health insurance, rent, utilities and some interest expense.

(7)  Now think math:

A times B

A is the sum of those expenses described in (6) for the 8 weeks after you get the loan.

(8)  Let’s talk B.

B is a fraction. The government wants to know whether your workforce has gone up or down in number.

The numerator is going to be the number of employees between February 15 and June 30, 2020.

The denominator is the number of employees during the same period in 2019.

There are adjustments for real-life situations that do not fit the above periods.

There is also a test which substitutes payroll dollars for the number of employees. You fail the test if your payroll reduction (dollar-wise) exceeds 25%.

(9)  So what, you ask.

Let’s say you have 17 employees for the 2020 period.

Let’s say you had 16 employees for the 2019 period.

Fraction-wise, that is over 100%. Let’s round that down to 100%.

Let’s multiply that 100% by something.

What is the something?

The loan you took out.

Let’s say the loan was $125,000.

Multiply $125,000 by 100%.

You get $125,000.

The government will forgive 100 PERCENT of the loan! The entire $125,000 is gone, forgiven, paid-off, hasta luego, soyonara.

Wow.

(10)      Is there a follow-up to that?

Yep.

Generally, the forgiveness of debt results in income to the person whose debt was forgiven. It is why people get those 1099s in the mail from the credit card companies which have given up on collecting.

For purposes of this loan, the forgiveness will NOT count as income.

So let’s get this straight. You keep your employees on board. The government loans you money for your payroll. The government forgives the money. You walk away scot-free.

What happens if you don’t get to 100%? Then a portion of the loan remains. You pay interest not to exceed 4% and repay that portion of the loan over a period of up to 10 years. Still … not bad.

Folks, if this is you – please check it out before the deadline or the funding runs out.

Employee or Contractor? There Is a New IRS Program

One of my individual tax clients came in around ten days ago. He brought his 2010 tax information, including a cleaning business reported as a proprietorship (technically it is a single-member LLC). I noticed that his payroll stopped somewhere during quarter 4, 2010. This of course prompted the question: why?

I suppose I did not need to ask. I have heard it before: the payroll taxes, including workers compensation, were becoming expensive. He consequently moved everyone over to a “Form 1099,” figuring that would solve his problem.

Let’s go through the steps: (1) If you can control and direct them, they are not contractors – they are employees; [2] removing them from payroll does not make them contractors; [3] issuing a 1099 at the end of the year (which he did not do, by the way, because I would have done it) does not make them contractors; and [4] a very important person – the IRS – may disagree with your opinion that they are contractors. If they disagree, the IRS may want the payroll taxes from you anyway. You would have gained nothing except an IRS audit and my professional fee for representing you.

Yep, I got stern with my client. I do not like dumb, and what he did was dumb. Payroll tax problems can get very messy – and absurdly expensive - very fast. I told him to restart the payroll.

The reason for this story is that the IRS came out this month with a “Voluntary Classification Settlement Program.” The program allows employers a chance to reclassify independent contractors and limit their resulting federal payroll taxes. To participate one must have consistently treated the individuals as contractors (that would eliminate my client) and have filed all Forms 1099 (again eliminating my client). One cannot currently be under audit, as there is a separate program for those under audit. One also has to agree to extend the statute of limitations assessment period for each of the three years going forward.

In return, one gains a substantial tax break. Before explaining, I would like to review Section 3509 of the Internal Revenue Code:

3509(a)In General.— If any employer fails to deduct and withhold any tax  … with respect to any employee by reason of treating such employee as not being an employee for purposes of such chapter or subchapter, the amount of the employer's liability for—

3509(a)(1)Withholding taxes.— Tax … for such year with respect to such employee shall be determined as if the amount required to be deducted and withheld were equal to 1.5 percent of the wages…paid to such employee.

3509(a)(2)Employee social security tax.— Taxes … with respect to such employee shall be determined as if the taxes imposed under such subchapter were 20 percent of the amount imposed under such subchapter without regard to this subparagraph.

Let’s go over the math:

                                Employer share of FICA                             7.65%

                                Employee share of FICA                            1.53%  (i.e., 7.65% times 20%)

                                Employee federal income tax                  1.50%

                                                                                                      10.68%

So that reclassification is going to cost you an immediate 10.68%, plus penalties and interest.

The new program will allow one to

·   pay 10% of the tax otherwise due, which is 1.07% (10.68% times 10%)

·   limited to one year

·   no interest or penalties, and

·   the IRS will not conduct an employment tax audit with respect to one’s worker classification for prior years.

This is a pretty good deal.

Remember that the IRS’ new position (although they deny it) is that virtually anyone who does anything for anybody is an employee. Please remember to fork-over that social security tax, thank you. If you are “walking the line” on worker classification, please consider this program.