President Trump recently signed legislation that includes important provisions to help you keep your employees on the payroll during the COVID-19 crisis. These benefits are potentially available to all employers and, in some cases, the federal government will cover many of the costs of continuing to pay your employees for some time.
The new programs are complicated, and there are important choices to make in deciding how to utilize them best. We've partnered with NAPEO to outline below the ways you can get assistance with payroll expenses during this crisis. A detailed summary of the programs can be found here.
Small Business Administration (SBA) Paycheck Protection Loan Program
The most significant change is a new streamlined SBA loan program to provide eligible businesses with cash to meet payroll (including benefits) and other fixed costs (such as rent, interest on mortgages, and utility payments) for up to eight weeks. The maximum loan amount would be 250% of the employer's average monthly payroll costs, capped at $10 million. The law expands the previous SBA definition of "small employer" in several ways to increase the availability of these loans. It makes changes in the traditional SBA loan process that should speed up the process of obtaining a loan. Additionally, after the borrowing business demonstrates that the loan proceeds were used to maintain previous payroll or pay other fixed costs, the loans (and any interest due) would be eligible for very generous loan forgiveness (and the forgiven amounts would not be taxable). Click here for a guide and checklist on the new loan program from the U.S. Chamber of Commerce.
Visit the U.S. Department of Treasury's CARES Act website for key documents. Although applications for the Paycheck Protection Program (PPP) cannot be submitted until April 3, the loan application is now available.
50% Employee Retention Tax Credit
Another option allows employers (regardless of size) that are uniquely affected by COVID-19 to claim a refundable tax credit against the employer portion of payroll tax equal to 50% of certain wages paid to an employee between March 13, 2020, through the end of the year. Only $10,000 of wages could be taken into account for any employee. This 50% credit would be available to businesses (i) that have had their operations fully or partially suspended by government order due to COVID-19 or (ii) that experienced a 50% decline in gross receipts during a 2020 calendar quarter when compared with the same quarter in 2019.
Social Security Tax Deferral
Another provision that is available to employers of all sizes is the ability to defer the payment of the employer portion of Social Security taxes (6.2% of wages) for the remainder of 2020. Fifty percent of those deferred taxes would have to be repaid by the end of 2021, with the remainder due by the end of 2022.
You Can't Choose All of the Above
Each of these new alternatives provide very generous tax subsidies to assist employers. But, you'll still need to make choices.
- If you obtain one of the new SBA loans, you are not eligible for the 50% employee retention tax credit.
- If you have a new SBA loan forgiven, you cannot take advantage of the Social Security tax deferral.
- If you claim the 50% employee retention credit, you will no longer be eligible for an SBA loan.
- If you take advantage of the Social Security tax deferral, you will no longer be eligible to have your SBA loan forgiven.
It is critical that you carefully evaluate your eligibility for the benefits of each option, since the amount of assistance provided by the federal government could vary greatly depending on which path you choose. Right now, we don't have all the details and are awaiting further guidance from the SBA and IRS.
Note: In addition to federal initiatives, states are also introducing relief programs. You may apply for both.
COVID-19 Paid Leave Requirements Take Effect April 1
Keep in mind that the new rules requiring most employers to provide paid sick leave and FMLA leave for COVID19-related reasons will go into effect on April 1, 2020. The federal government will reimburse employers for most of those costs through a tax credit. However, we are awaiting further guidance on this from the IRS, including information about how the credit may be advanced to employers. Significantly, recent guidance from the U.S. Department of Labor suggests that, if your business closes for any reason, the paid sick leave and expanded FMLA requirements would not apply as of the date your business closes.
Partnering with a PEO Does Not Negatively Influence Qualification for a CARES Act Loan
With the recent passage of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), many businesses have begun to ask whether contracting services with a professional employer organization (PEO) will interfere with the business's ability to qualify for a CARES Act loan, including under the new Paycheck Protection Program.
The answer is a resounding "NO!" according to case law, statutory regulations, and statements made by the Small Business Administration (SBA).
- Sections 1101, et. seq., of the CARES Act creates a new line of small business loans—funded by over $349 billion — for relief from economic pressures caused by the COVID-19 outbreak.
- These loans were created by (among other things) amending Section 7(a) of the Small Business Act (the SBA), which is the statute that governs small-business loans in less turbulent times.
- In general, to qualify for one of these new loans, the business must have fewer than 500 employees.
- In a traditional PEO relationship, while the business employs the employees for purposes of day-to-day worksite functions, the PEO acts as the administrative employer by paying wages and collecting and remitting payroll taxes under its own FEIN, not only for the business's employees but all of the PEO's other business clients.
- Given this relationship, some small businesses are concerned that they will not qualify for the new loans if the "500 or fewer" requirements (or other similar requirements) are examined at the PEO level — which could have hundreds of thousands of co-employees — rather than at the client level.
- As far back as 1989, the Small Business Administration's Office of Hearings and Appeals reversed its regional office's determination that the PEO's total number of co-employees must be counted against the small-business client. In reversing, the tribunal found that the PEO was merely acting as an administrative employer, and so only the employees of the small-business client would be counted. SIZE APPEAL OF: Maryland Assemblies, Inc., 1989 SBA LEXIS 74 (SBA Office of Hearings and Appeals).
- Based in part on Maryland Assemblies, 13 CFR § 121.103(b)(4) of the SBA's affiliation regulations were amended to echo the same result:
BUSINESS CONCERNS WHICH LEASE EMPLOYEES FROM CONCERNS PRIMARILY ENGAGED IN LEASING EMPLOYEES TO OTHER BUSINESSES OR WHICH ENTER INTO A CO-EMPLOYER ARRANGEMENT WITH A PROFESSIONAL EMPLOYER ORGANIZATION (PEO) ARE NOT AFFILIATED WITH THE LEASING COMPANY OR PEO SOLELY ON THE BASIS OF A LEASING AGREEMENT.
- Additionally, Question (6) on page 16 of the Small Business Administration's own Small Business Compliance Guide: Size and Affiliation dated June 2018 agrees:
(6) A BUSINESS THAT LEASES EMPLOYEES FROM A BUSINESS PRIMARILY ENGAGED IN LEASING EMPLOYEES TO OTHER BUSINESSES OR WHICH ENTER INTO A CO-EMPLOYER ARRANGEMENT WITH A PROFESSIONAL EMPLOYER ORGANIZATION (PEO) IS NOT AFFILIATED WITH THE LEASING COMPANY OR PEO SOLELY BECAUSE IT LEASES OR CO-EMPLOYS EMPLOYEES. EXAMPLE: COMPANY A LEASES 80% OF ITS EMPLOYEES FROM A COMPANY THAT PRIMARILY LEASES INDIVIDUALS TO OTHER COMPANIES. COMPANY A IS NOT AFFILIATED WITH THE LEASING COMPANY SOLELY BECAUSE OF THE LEASING RELATIONSHIP.