Below are our summaries of some of the relevant sections of the CARES Act passed by Congress and signed into law March 24. As always, consult with your legal counsel and financial advisors as to best options for your company’s particular situation.
Paycheck Protection Program
The Paycheck Protection Program has given the Small Business Administration authority to provide small business loans with special properties, backed by the federal government.
The program is for employers who maintain their payroll during the COVID-19 emergency. If employers generally maintain their payroll, the loan would be eligible for forgiveness of up to 8 weeks of payroll plus utility and rent/mortgage interest costs, based on employee retention and salary level continuity.
Loans will also have no SBA fees, and at least six months of deferral with maximum deferrals of up to a year. Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020.
This program would be retroactive to February 15, 2020, in order to help bring workers who may have already been laid off back onto payrolls; loans are available through June 30, 2020.
The program and its eligibility requirements can be broken into two distinct parts: the loan itself, and the forgivable part of it (what the government will pay off for you).
The loan itself
- The types of businesses and entities eligible for the Paycheck Protection Program are businesses with fewer than 500 employees, sole proprietors, nonprofits, independent contractors, tribal entities, and eligible self-employed individuals. To be eligible the business must have been in operation on February 15, 2020.
- The maximum loan amount is the lesser of: $10 million or 250% of average monthly payroll costs through December 31, 2020 and the maximum maturity is 10 years after application for forgiveness.
- Business loans may be used for payroll support, such as employee salaries, commission, regular paid leave (not COVID-19 leave, which is covered under a different provision), insurance premiums, mortgage, rent and utility payments. The loan must include a “good faith certificate” to use funds for this purpose.
- Limitation on loans – CANNOT use to compensate employees at an annual rate of pay above $100,000 (prorated to the eight weeks) or to pay for emergency sick and family leave.
- Any canceled debt under the program is excluded from borrower’s gross income for tax purposes.
Borrowers may be eligible for loan forgiveness equal to the amount spent during an 8 week period after the origination date of the loan on: payroll costs; interest payment on any mortgage incurred prior to February 15, 2020; payment of rent for lease in force prior to February 15, 2020; payment of utility services that were begun prior to February 15, 2020.
- Amounts forgiven of course may not exceed the principal amount of the loan.
- Forgiveness is equal to the sum of payroll costs incurred during covered 8 week period compared to the previous year or time period, proportionate to maintaining employees and wages:
- Formula: Payroll costs PLUS any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation) PLUS any payment on any covered rent obligation and any covered utility payment
- Forgiveness Reduction: Amount forgiven is reduced proportionately by any reduction in employees retained compared to the prior year and reduced by the reduction in pay of any employee beyond 25 percent of their prior year compensation.
Emergency EIDL grants & loans
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL).
The advance is intended to provide immediate assistance for eligible expenses such as keeping employees on payroll, paying for sick leave or to pay business obligations including debts, rent and mortgage payments. The advance does not need to be repaid… in other words, it just comes off the top of the loan.
Entities that can apply for an EIDL have been expanded to include tribal business, cooperatives and ESOP’s with fewer than 500 employees or any individual operating as a sole proprietor or independent contractor between January 31, 2020 and December 31, 2020.
The loan maximum is $2 million… with the emergency advance on that loan set at maximum $10,000.
Payroll Tax Credit
A refundable payroll tax credit for 50% of qualified wages paid to certain employees during the COVID-19 crisis is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.
The credit is also provided to employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis. The credit is for wages paid between March 13, 2020 through December 31, 2020.
- For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19 related circumstances described above.
- For eligible employers with fewer than 100 full time employees, all employee wages qualify for the payroll tax credit, whether the employer is open for business or subject to a shut-down order
- Credit will be capped after the first $10,000 of compensation, including health benefits, paid to an eligible employee.
- Employers participating in the Paycheck Prevention Program are NOT eligible for the payroll tax credits.
Deferred Employer Payroll Taxes
Employers and self-employed individuals can defer 50% of the employer share of the Social Security tax otherwise owed to the federal government. Payment of the deferred tax is due over two years with 50% due December 31, 2021 and the remaining half by December 31, 2022.
• Employers taking part in Paycheck Prevention Program are NOT eligible for deferment of employer payroll taxes.
A word about Employer of Record (EOR) / Statutory Payroll
As you may know, the employment structure under which “Employer-of-Record” entertainment payroll service companies and their clients operate is different from a direct, single employer structure.
In the EOR model, the production company is what’s known as the “common law employer” for hiring, wage-and-hour compliance, working conditions, safety, etc…. while the payroll company is the “statutory employer,” responsible for tax withholdings/ contributions, unemployment and workers’ comp claims. The payroll company statutory employer is known colloquially as “Employer of Record.”
Under this model, the EOR payroll company submits all employer payroll taxes (Social Security, Disability, State Unemployment and Federal Unemployment) under its own Employer Information Number (EIN). This can present an additional layer of complexity when it comes to claiming a payroll tax credit.
Current guidance from the Department of Treasury and the IRS do not address this particular case, so we do not have complete information yet. As for the PPP small business loan, we are in discussions with lenders as to what they can accept as backing documentation for payroll.
For current payroll clients: we currently have payroll reporting available which may meet your needs for some of the above programs. Please get in touch at firstname.lastname@example.org to request.