Payroll Protection Program for the Self-Employed and Payroll Tax Updates

By Gina Brymer, CPA - Senior Manager and Harry A. Steindler, CPA - Partner
April 16, 2020

On April 14, 2020, the Small Business Administration (SBA) released another Interim Final Rule related to the Payroll Protection Program (PPP). This Rule provides guidance for individuals with self-employment income who file a Form 1040, Schedule C.

Taxpayers who file a Form 1040, Schedule C are eligible for a PPP loan as long as the following criteria are met:

  • In operation on February 15, 2020;
  • Have self-employment income (as an independent contractor or sole proprietor);
  • Principal place of residence is the United States; and
  • Filed or will file a Form 1040, Schedule C for 2019.

This new guidance provides information on how loan amounts are calculated with and without employees, eligible uses of loan proceeds, and how loan forgiveness is calculated. It also details the documentation that should be submitted with the loan application and request for forgiveness.

For partners in a partnership, the new rule allows the self-employment income from a general active partner, limited to $100,000 annualized, to be included as a “payroll cost” in a partnership’s loan application. Note, the rule specifically bars a partner from submitting a separate loan application for his/her own self-employment income. Previously, no guidance was provided. The SBA has clarified this issue in this new guidance.

THE DEFERRED PAYMENT OF THE EMPLOYER PORTION OF SOCIAL SECURITY TAX

The CARES Act allows employers to delay payment of employer payroll taxes (the 6.2% social security tax) through the end of 2020. The deferred tax liability would be paid in two installments – half by December 31, 2021 and the remaining half by December 31, 2022. This deferral applies to deposits and payments that would have been required during the period beginning on March 27, 2020 and ending on December 31, 2020. The IRS has provided additional guidance related to the deferral of the employment tax deposits if employers participate in the Payroll Protection Program (PPP).

Employers who have received a PPP loan, but whose loan has not been forgiven yet may still defer employment taxes until a decision is made by the lender regarding the loan forgiveness. Once a decision is made to forgive the loan, the employer may no longer defer the social security taxes after that date. However, the amount of the employer’s social security tax that was deferred through that date is still deferred.

REFUNDABLE PAYROLL TAX CREDIT FOR RETAINING EMPLOYEES

Another provision of the CARES Act creates a new employee retention credit in the form of a refundable payroll tax credit. It was established to retain employees and to continue to pay compensation to them. The credit is computed at 50% of wages up to $10,000 of wages per employee for eligible employers ($5,000 credit). Wages also include a portion of the cost of employer provided health care. Eligible employers are those who were required to partially or fully suspend operations due to COVID-19 or who have gross receipts of 50% or less this quarter compared to the same quarter in the previous year. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify at the end of that quarter. The is measured every calendar quarter.

The qualified wages depend on the number of employees the employer had in 2019. For employers with 100 or fewer full-time employees, all employee wages would qualify. For employers with more than 100 full-time employees, qualifying wages are wages paid when employee services are not provided, limited to 30 days per employee. The credit is provided for qualified wages paid or incurred from March 13, 2020 through December 31, 2020. Employers can claim the credit by reducing their required payroll taxes that are withheld for employees. If the credit is greater than the payroll taxes, the employer may receive an advance credit by filing Form 7200 – Advance Payment of Employer Credits Due to COVID-19. This credit is not available for wages related to the qualified sick and family leave payments under the Families First Coronavirus Response Act. Nor is this credit available for businesses who participate in the Paycheck Protection Program.

We will continue to closely monitor any new developments and keep you informed. If you have any questions or would like help in reviewing your eligibility for any of these programs, please contact your MichaelSilver tax professionals at 847.982.0333.