Payroll pitfalls

Features - Finance & Accounting

Learn about the labor-related tax benefits and the potential problem areas to avoid.

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August 20, 2020

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The pandemic didn’t disrupt many snow removal and ice management businesses – yet. For those who have, or will be, impacted lawmakers created a variety of tax benefits for employer and employee alike, that range from tax credits for retaining workers to payroll tax delays. Unfortunately, there are also quite a few potential pitfalls everyone should be aware of.

EMPLOYER RETENTION CREDITS

The Coronavirus Aid, Relief and Economic Security (CARES) Act contained a credit against payroll taxes for wages paid to employees in 2020. The credit, a reduction in the operation’s tax bill rather than a deduction from the income that tax bill is based on, is available to snow removal and ice management businesses that were forced to shut down or suspend operations due to the pandemic.

The refundable credit equals 50% of the first $10,000 of qualified wages paid to an employee during the year ending Dec. 31, 2020. It should be noted, however, that an employer can’t claim both the employee retention credit and the family and medical leave credit for the same wages.

PAYROLL TAX DELAY

The CARES Act also allowed snow removal and ice management businesses affected by the coronavirus pandemic to defer payroll taxes that would normally be due in 2020. This applies to the employer’s share of the 6.2% Social Security tax component. Under the new rules, an employer can choose to pay 50% of the required amount by Dec. 31, 2021, with the remaining 50% due by Dec. 31, 2022.

A similar deferral is available for self-employed individuals. They can defer 50% of their self-employment tax by paying 25% by Dec. 31, 2021 and the remaining 25% by December 31, 2022.

PAID LEAVE TAX CREDITS

Thanks to the Families First Coronavirus Response (FFCR) Act, some employers were required to provide employees with paid sick time if they were unable to work or telework because they were quarantined as a result of the coronavirus or in order to care for an individual who was subject to quarantine.

Fortunately, not only are employers with fewer than 500 employees exempt from the paid leave requirements, small and mid-sized employers can take advantage of two new refundable payroll tax credits designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing coronavirus-related relief to their employees.

Businesses with less than 500 employees can use the funds to provide employees with paid leave, either for the employee’s own health care needs or to care for their family members. As mentioned, eligible employers can claim this credit based on qualifying leave they provided between the effective date and Dec. 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Along with the sick leave credit for an employee who is unable to work because of a need to care for a child, eligible employers can receive a refundable childcare leave credit. This tax credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 total. Up to 10 weeks of qualifying leave can be counted towards the childcare leave credit. Eligible employers are entitled to an additional tax credit determined based on the cost of maintaining health insurance coverage for the eligible employee during the leave period.

PAYROLL PROTECTON PROGRAM

The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) program titled the Paycheck Protection Program (PPP). Under the program, the SBA was allocated funds for loans to small businesses to help pay up to eight weeks of payroll taxes, mortgages, rent and utilities during the coronavirus pandemic.

Under the PPP, all loan payments of principal, interest and fees were deferred for at least six months. Best of all, most loans can be converted to grants with the amount forgiven excluded from the recipient’s gross income.

To qualify for PPP funds, a snow removal business must have fewer than 500 full- or part-time employees. PPP loans can be as large as $10 million. But most organizations will receive smaller amounts – generally a maximum of 2.5 times their average monthly payroll costs.

On paper, the forgiveness terms are straightforward requiring the borrowing business to spend 75% of the amount borrowed on payroll costs such as salaries, leave, severance pay and health insurance within the first two months. The remaining 25% could be spent on other operating costs such as rent and utilities. Money spent on non-qualifying expenses must be repaid at an annual rate of 1% within two years.

Unfortunately, calculating partial forgiveness has proven to be tricky for borrowers who didn’t meet the 75% threshold. Among the trouble spots are question of when employees must be rehired and what happens if borrowers do not use the funds as promised?

PPP LOANS, INDEPENDENT CONTRACTORS, AND “GIG” WORKERS

Although the SBA’s original rules suggested that a business’s Form 1099 (Miscellaneous Income) costs were essentially equivalent to payroll costs, the final rules limit payroll costs for small businesses that use independent contractors or are operated by sole proprietors. In other words, payroll costs are limited to compensation paid to employees.

However, while payments to independent contractors are not payroll costs, an independent contractor may qualify as a small business that is eligible for a PPP loan. For an independent contractor or a sole proprietor, payroll costs are equal to wages, commissions, income or net earnings from self-employment or similar compensation.

OTHER POTENTIAL HEADACHES OR BENEFITS

In light of the many “stay-at-home” orders and mandated closings, many businesses were forced to -– and may still be – operating part or all of their business remotely, with workers and/or the business itself stretching into another state or local taxing jurisdiction. Employers, all employers, are also facing potentially expensive attacks on their bottom-line at the local, state and federal level. Consider:

Next door taxes. Is a business with employees “remotely working” in another state “doing business” in that state? In many cases, the presence of an employee in another state is sufficient to create “nexus,” which can trigger property, sales or employment taxes in that jurisdiction.

Minimum Wages. If the state’s hourly minimum wage rate is higher than the federal rate ($7.25), the snow removal business must pay the higher of the two rates.

Workers’ Compensation. All states require employers to purchase workers’ compensation insurance and to compensate employees for workplace injuries or illnesses. Some states allow the snow and ice removal business to purchase its own workers’ compensation insurance, purchase the state insurance or, in some cases, self-insure.

Disability Insurance. Some states mandate employee or employer participation in disability insurance programs that pay employees for nonwork-related short-term disabilities. California and Rhode Island, for example, fund their programs through employee payroll deductions while New York and New Jersey require covered employers to pay disability benefits.

Unemployment Insurance. The federal government and individual states have unemployment tax laws that work together to provide employees with benefits if they have lost their jobs. Most employers pay both federal and state unemployment taxes, and most states have their own laws.

On the federal level, the U.S. Department of Labor has proposed new rules that will make 1.3 million workers earning less than $35,568 annually eligible for overtime pay. But, that’s not all. Further compounding the payroll headaches, California recently tightened the definition of “independent contractor” with many other states expected to follow suit. Not to be outdone, the IRS, announced an expansion of their worker classification education and enforcement campaign to combat employment tax crimes.

Given the current economic climate, many laid-off workers remain unemployed. Many laid-off workers continue to receive more on unemployment than if they returned to work. Employers eager to hold down payroll costs reportedly hesitate to hire back older and more experienced workers.

Resolving employee- or employment-related issues is obviously necessary for every snow removal business. The many benefit programs and plans available – and the potential pitfalls – make professional advice and assistance almost mandatory.

Mark E. Battersby is Snow Magazine’s financial writer. He resides in Ardmore, Pa.