Gross or Net Payroll Under the Paycheck Protection Program?
First, as of today, the Paycheck Protection Program loan application process is officially open to everyone eligible for loans, including sole proprietors and independent contractors. So, if you haven’t yet applied, there is no excuse! One recent development, in the ever-evolving Paycheck Protection Program, has been whether payroll costs are gross or net.
One of the biggest areas of confusion coming from the CARES Act §1102 was that it seemed to indicate that payments of federal withholding taxes on behalf of an employee would not be deemed part of payroll costs for the period from February 15, 2020 to June 30, 2020. That would reduce the amount that could be borrowed and the expenditures that count as payroll for forgiveness of debt.
In a recent FAQ, the SBA has clarified that there will be no such reduction in gross payroll by taxes withheld. As for the previously cited provision, they have chosen to ignore it.
Question: 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?
Answer: 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 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 under the statute.
Since federal agencies are bound by the text of the law, the SBA was put in a position requiring it to put a footnote in the FAQ. In order to justify its position, the SBA delved deep into the CARES Act to provide its legal analysis:
The definition of “payroll costs” in the CARES Act, 15 U.S.C. 636(a)(36)(A)(viii), excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020. As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages. Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages. This interpretation is consistent with the text of the statute and advances the legislative purpose of ensuring workers remain paid and employed. Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.
So, if you still haven’t applied, make sure to include your gross payroll for your loan amount. and do it in a hurry! Time is of the essence while the program still has funding! As always, if you have any questions regarding the program, you can reach me at firstname.lastname@example.org. For questions about the enhanced unemployment benefits under the CARES Act, contact my partner, Natalie Shrader email@example.com.