by John Schachter, EA
Every business has been affected by the COVID-19 pandemic. For a few, business is better than ever. For most, it’s an unprecedented crash. Here are resources to consider as you plan for survival and the recovery that will, eventually, arrive.
This information is focused on enterprises with from 1 to 100 workers. State and federal response to the COVID-19 pandemic is ongoing and the situation is in near-constant flux. Regulations and applications are pending. Businesses and their advisors will need to monitor developments closely.
It will be smart to be ready to apply for available benefits as soon as possible. You will need information about current and prior revenues, expenses and payroll, including copies of tax returns and financial statements. You will want to connect with your payroll provider, if you have one, about implementing paid leave, tax credits and a postponement of the due date for depositing Social Security tax.
You should check with the states where you do business to see what relief they can offer. For example, Massachusetts has delayed payment of sales, meals and room occupancy tax due between March 20, 2020 and May 31, 2020 to June 20, 2020 with no interest or penalty for smaller operators and interest only for larger concerns.
Business Interruption Insurance
Probably not, but states are considering action to force payouts and a lawyer might be able to help
Your insurance policy might, but probably won’t, cover losses due to the COVID-19 pandemic. It’s worth reviewing the policy, especially if you suffered damage or loss of property. If the insurance company turns you down, consider getting a lawyer’s advice. Insurers are famous for reading contracts their way to avoid paying out. Some states, including Massachusetts and New Jersey, are considering legislation to force insurers to pay claims. The states will reimburse the insurers.
Takeaway: If you have business interruption insurance, don’t take no for an answer.
Layoffs & Unemployment
Self-Employed Can Claim
A suspended or closed business can layoff or terminate some or all of its workforce. Employers are required to notify workers of their rights to claim unemployment benefits. Separated workers can and should file unemployment claims as soon as possible. Business owners can claim unemployment if they didn’t cause their own job loss.
Unemployment benefits have been significantly enhanced in response to the pandemic. Self-employed people and gig workers can claim, not just employees. Congress increased the weekly benefit by $600 for benefits paid before July 31 2020.
An employer’s future unemployment payroll tax will generally go up the more its workers claim in unemployment benefits. The increase can be significant. But it won’t be nearly as much as the wage expense avoided by laying off or terminating workers. And some states are not dinging employers for COVID-related layoffs.
States offer Workshare programs, where employers can cut back hours and, thus, costs, while affected workers can claim partial unemployment benefits.
Takeaways: Anyone entitled to unemployment benefits should claim them, including the self-employed, though a Paycheck Protection Program loan might be a better deal for higher-paid self-employed folks. For businesses, layoffs make payroll costs go away. Employer payroll taxes will rise during the post-recession recovery.
Paycheck Protection Program: Help with Costs of Retained Workers & Overhead Costs
Businesses can borrow up to 2.5 months of payroll on an SBA loan from a bank and not repay at least some of it if spent on payroll and overhead
Paycheck Protection Loans will be made by a participating bank between April 6, 2020 and June 30, 2020 and guaranteed by the Small Business Administration. No personal guaranty is required. To qualify, the borrower must certify in good faith that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower. The loan can be as much as 2.5 times the prior year’s average monthly payroll, with a cap of $100,000 on each employee’s prior year payroll. Example: in the prior year you paid Joe $15,000, Jaycee $140,000 and Bosco $5,000. Your prior year payroll for loan purposes is $120,000, because you cap Jaycee’s payroll at $100,000. Your Paycheck Protection Loan maximum is $25,000, which is 2.5 times your monthly payroll of $10,000. The costs of employer-paid health insurance, state payroll tax and retirement benefits are included in the calculation of payroll costs, outside of the $100,000 limit. To the extent of payroll, benefits, rent, utilities and mortgage interest paid or incurred within the 24-week period after the loan is issued, the loan need never be repaid – except that this loan forgiveness can’t be more than your payroll costs divided by 60%. Also, the eight-week period cannot extend past December 31, 2020. Any amount after loan forgiveness is payable at 1% over a five-year term.
Loan forgiveness is reduced if you cut specific employees’ salaries by more than 25% of what it was prior to February 15, 2020. Cuts to those earning more than $100,000 are not considered. You also need to maintain average monthly headcount to get full loan forgiveness. There are quirks in how you measure average headcount and rate of pay. You can avoid these haircuts by restoring pay and headcount by December 31, 2020.
If you already had taken out an SBA disaster loan, you can refinance it into your Paycheck Protection Loan.
Usually, loan forgiveness is taxable. Not so for these Paycheck Protection Loans. But expenses paid with loan proceeds will not be tax deductible. That makes it a wash, for taxes: no income on receiving the loan or its forgiveness, but no deduction, either, for costs paid with forgiven loan proceeds.
Self-employed people can use 2019 profits, reported on Schedule C and limited to $100,000, plus amounts paid to any employees, as basis for a loan that can be forgiven to the extent of their profits in 2020. You will need your 2019 Schedule C to apply. If you haven’t prepared it, get cracking!
You can’t claim unemployment and also use a PPP loan for yourself.
Partners in a partnership are considered self-employed for tax purposes. But for PPP Loans, it is the partnership, not the partner, who can apply for the loan.
You cannot claim the Employer Retention Credit – discussed below – and also use a PPP Loan.
Takeaway: This is a big giveaway. Every business that can make the required certification should apply for the loan, after considering whether the Employee Retention Credit, discussed below, is available and a better deal. A self-employed person with no employees should apply for this loan unless enhanced unemployment benefits are better.
Payroll Tax Deferral
Employers don’t have to pay Social Security tax till after 2020
Employers pay Social Security tax of 6.2% on the first $137,700 of wages they pay each employee. That’s a maximum of $8,537 per employee. The tax is reported on Form 941, filed quarterly. Self-employed people pay this tax as well, generally via four estimated tax installments.
For payroll paid between March 27 and the end of 2020, employers do not have to deposit their share of Social Security tax on the usual schedule. Instead, they will deposit half of the deferred tax on December 31, 2021 and the rest on December 31, 2022.
Takeaway: It’s an interest-free loan of 6.2% of payroll, basically. No special requirements to claim this benefit. Every business should do it. Just make sure to have the cash ready at the end of the next two years!
Employee Retention Credit
Government will pay half the wages of retained or furloughed workers to businesses suspended or greatly diminished by pandemic. A $5,000 limit per worker applies.
If business operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings OR if gross revenues for a calendar quarter are down more than 50% on the prior year, a business can claim a refundable credit of 50% of the first $10,000 of wages it pays to those it keeps on payroll. You get this so-called Employee Retention Credit against payroll tax you would otherwise deposit with the IRS. If the credit is more than the wages, the IRS will refund the excess.
You cannot double-dip by claiming the employee retention credit while also claiming the credit for sick or family leave, discussed below. If you claim the employee retention credit, your business will be ineligible for a Paycheck Protection Loan.
You could call back laid off workers and claim a larger credit than otherwise.
Takeaway: It’s a grant. You will report it as income and pay tax on it. If your business qualifies, and if a Paycheck Protection Loan isn’t a better deal, it should claim this subsidy. But you will still have to pay the other half of retained workers’ wages.
Mandatory Sick & Family Leave for 2020 Only
Government will pay 100% – those with fewer than 50 employees may be exempted
Workers who are sick or whose family members are sick or whose kids’ schools have closed can take time off. Workers must have been on the job for at least 30 calendar days to qualify. There is sick leave and family leave.
Sick Leave: 80 hours of paid sick leave to full time employees who cannot work or telework. Two weeks of paid sick leave to part time employees, based on average hours. Full pay for workers sick or in quarantine, up to $511 per day or $5110 in the aggregate. Two-thirds pay for those caring for someone in quarantine or to care for a child if school or place or care has been closed, up to $200 per day or $2,000 in the aggregate.
This paid sick time is granted in addition to any sick leave already available from the employer. The employer cannot change its policies to take away pre-existing leave. The employer cannot require the employee to use accrued time off before claiming this new benefit. The employee can clam accrued time off in addition to the new benefit.
Family leave: In addition to sick leave, an employee who is unable to work, including telework, because of a need to care for a child under 18 years of age whose school or child care facility is closed or whose child care provider is unavailable because of the coronavirus is entitled to up to ten weeks of paid family leave. Presumably, these come after the first two weeks of paid sick leave. Leave is paid at two-thirds of regular pay, subject to a cap of $200 per day or $10,000 in the aggregate.
Many useful FAQs are available here: https://www.dol.gov/agencies/whd/pandemic/ffcra-questions
The employer must generally retain the employee’s job. Not so for highly-paid “key” employees. And employers with fewer than 25 employees are exempt from the requirement to rehire the employee under certain hardship circumstances.
An employer with no more than 50 employees can waive the benefits for employees with kids at home if the employer determines that providing the leave would severely damage the business.
The DOL FAQ page has details of these and other provisions.
These mandatory leave provisions apply from March 18, 2020 through the end of the year.
The government will reimburse the employer the full amount of the mandated benefits through a tax credit. In the end, the employer won’t be out of pocket anything more than the administrative costs.
Normally, a business must wait till it files tax returns to claim tax credits. To speed up the process, the IRS has announced employers can hold back from payroll tax deposits as much as needed to cover mandated benefits. If the mandated benefits are more than the payroll tax that would be deposited, the employer can request payment of the shortfall from the IRS. The IRS will pay within two weeks. Use Form 7200 to get an advance on the credit.
Self-employed people can claim a tax credit equivalent to the family leave amounts, provided they aren’t already receiving benefits through a payroll job. It appears they can short-pay 2020 estimated tax by the amount of the expected credit.
Takeaways: Affected businesses already should have provided notice of the new benefits to employees. If your business is small enough AND meets requirements to be determined, it need not provide this leave. It will be important to obey the mandates under the law and to be vigilant about recovering the costs from the government promptly so as not to deplete cash in this crisis. Self-employed people who qualify should claim family leave benefits by reducing the tax they prepay for 2020. They will get a refund if their 2020 taxes are less than the benefit.