How COVID-19 is Directly Impacting Your Payroll

May 13, 2020 | Article

As organizations struggle with the new normal in the wake of the COVID-19 pandemic, many are taking advantage of various legislative relief provisions. But what you may not consider is the critical impact these provisions will have on your payroll processes. 

Many of the relief provisions have elements that impact your organization’s payroll:

  • The Families First Act requires paid time off for employees impacted by COVID-19.
  • The Paycheck Protection Program requires 75% of loan funds be used for payroll costs.
  • The CARES Act includes a refundable payroll tax credit provision and the ability to defer payment of the employer’s share of payroll taxes.

Knowing how these provisions impact your payroll will be vital in ensuring accurate income records and proper documentation.

Unsure how to document everything? We’ve developed a resource to make sense of FFCRA tracking.

Payroll and the Families First Act

The Families First Act requires employers to provide paid sick and expanded family and medical leave for their employees impacted by the coronavirus pandemic.

Payment is required at regular rate of pay. If you have hourly employees, you must pay them their regular hourly rate for all non-overtime hours worked in a standard work week. Employers will then receive a dollar for dollar tax credit for this payout.

The Families First Act also has provisions requiring a 2/3 rate of pay for workers who are taking care of family members affected by COVID-19.

Once an employer has paid the employee, they can do an instant credit against the federal tax payment. If the tax payment does not cover the credit, the employer may fill out Form 7200 and fax it to the IRS to get a refund within two weeks of submitting.

The FFCRA is exempt from Social Security tax for the employer. The tax credit is the amount of wages paid under FFCRA, Medicare tax for the employer and qualified health plan expense.

How do I determine part-time hours under Families First?
If you have part-time employees, review the past six months of hours worked and divide it by 26 weeks. This will give you an average set of hours per week. If the employee has not been with you for six months, you can use the agreed-upon hours determined when the employee was hired.

For more information on specific types of scenarios like this under Families First, visit the Department of Labor’s website.

What to Do
It is essential your payroll is set up correctly from the start. Payroll reports will be key for documentation in relation to both Families First and the CARES Act.

  1. Setup Earning codes for FFCRA and department reporting
    • COVID 19 Sick: Use this code to track employees who are out on FFCRA with option 1-3 and are paid at full rate of pay up to $511/per day.
    • COVID 19 Sick 2/3: Use this to track employees who are out of FFCRA with options 4-6 and are paid at 2/3 rate of pay up to $200/per day.
    • COVID 19 Leave: Use this code to track your employee who is out for option 5 to have an additional 10 weeks of pay at 2/3 rate of pay up to $200/per day.
  2. Accruals

Accruals can help, especially when it comes to intermittent leave pay and documentation related to employees getting paid the proper amounts.

Set up your accruals as follows:

Full-time sick 80 hours
Part-time sick Average number of hours in two weeks
Leave time 400 hours (based on FT hours)
  1. Timesheets

Set up timesheets for employees to help outline which option they are taking and to ensure the correct number of hours are taken. The employee when requesting FFCRA wages must provide you with the dates requested for leave, the reason for the leave and a statement that you are unable to work because of option 1-6 for the FFCRA reasons. If the employee requests leave pay, they need to provide the name of the child and the name of the school, place of care or child care provider that has closed or become unavailable. We recommend getting an acknowledgement of these documents signed by your employee. 

  1. Recordkeeping

The IRS has stated you must keep records for at least four years. These records include:

  • Documentation of how you figured the amount of qualified sick and family leave wages eligible for the credit.
  • Documentation of how you figured out the amount of qualified health plan expenses allocated to wages.
  • Documentation of how you determined employees were qualified for sick and family leave wages.
  • Documentation of eligibility for the employee retention credit based on suspension or decline of operations in gross receipts.
  • Copies of completed Form(s) 7200 filed with the IRS.

The easiest way to compile this information, and keep it on hand, is by setting up the correct codes and structures early in your payroll software.

Need help understanding how to structure everything?

Payroll and the Paycheck Protection Program

Most of the funding received from the Payroll Protection Program (PPP) must be used toward payroll costs. The tracking here is critical, both for proper documentation and for potential loan forgiveness.

Ensure you:

  • Supply payroll reports and tax forms to determine costs of payroll.
  • Identify an employee who is receiving less than 25% of their normal hours or gross wages.
  • Identify anyone over the $100,000 wage threshold, as this does not qualify as part of PPP funding.
    • Calculate out the max per person during your eight weeks when over $100,000. Take the $100,000/52 weeks and times by eight weeks. The $15,384.62 is the max you can claim for one employee.
  • Maintain and document FTE counts during timeframe indicated for the PPP loan.
  • Review your payroll tax deferral options. Payroll taxes can be deferred from March 27 through the date the loan is forgiven.
  • If paying employees under the FFCRA, you may want to consider using the amounts for the PPP loan forgiveness and not apply the tax credit. If those wages are not needed for PPP forgiveness, the tax credit can be taken later.

As a reminder, you cannot take the employee retention credit if you took the PPP funding.

How do the different relief provisions compare?

COVID-19 Payroll Tax Deferral

Among the many tax provisions included in the Coronavirus Aid, Relief and Economic Security Act (CARES), crafted to provide liquidity for businesses suffering the effects of the COVID-19 outbreak, is one that postpones the employer portion of certain payroll taxes imposed in 2020.

These will then be paid back in two installments:

  • 50% due on December 31, 2021
  • 50% due on December 31, 2022

What Payroll Taxes Can be Postponed?

Generally, the payroll taxes that can be deferred to 2021 and 2022 include:

  • The employer’s share of Social Security taxes (the 6.2% employer portion up to the wage base amount of $137,700 for 2020)
  • The employer’s and employee representative’s share of Tier 1 Railroad Retirement Tax Act tax (corresponding to the 6.2% Social Security rate)
  • The equivalent amount of self-employment tax for individuals with self-employment income (50% of the 12.4% self-employment tax which equals the 6.2% Social Security rate)

Taxes that were due to be submitted on March 27, 2020 or later are eligible for deferral ending December 31st.

The CARES payroll tax deferral does not include an employer’s portion of Medicare taxes or any amounts withheld from employees (income tax withholdings and employee share of Social Security and Medicare). Payroll tax amounts reduced by the credits for qualified sick and family and medical leave wages or the Employee Retention Credit are not eligible for tax deferral.

Are Third-Party Agents Responsible for the Deferred Payments?

Special rules are provided in CARES for situations where an employer uses a third-party agent or a certified professional employer organization (CPEO) to handle its payroll. In these cases, the employer is responsible for ensuring the amounts of deferred payroll tax are paid by the respective due dates, not the third-party agent or CPEO.

How do you report this?

On June 19th the IRS released a new version of the 941 return. This allows employer to report the CARES and FFCRA amounts for Covid wages, credits and deferrals. On the new form line 13b, Deferred amount of the employer share of social security tax, this line is used for reporting the amount of the employer share of social security tax that the employer chose to defer instead of depositing for the normal deposit deadlines in the reported quarter, with the deferred amount s due in 2021 and 2022.

At any point in 2020 an employer can choose to go back and claim this deferral to reduce this year’s tax deposit. However, you need to remember that this tax is still due and will need to be repaid 50% 12/31/2021 and 50% (remaining) 12/31/2022.

How to Reconcile Your Payroll with Postponed Payroll Tax Payments

To begin, reconcile your payroll with each payroll process:

  1. Track the total amount of employer Social Security
  2. Document the amount deferred in another column. This will help with tracking what will be owed back.
Reconcile your payroll

How do you handle payroll taxes that could have been deferred that were paid?
On the next payroll tax payment, adjust the amount by the employer social security portion that was not deferred on tax payments starting March 27 to current date to catch up on the deferral.

Payroll and the Employee Retention Tax Credit

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wages, including allocable qualified health plan expenses, that eligible employers pay their workers.

 

The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.

What to Do

  1. Determine if you’re an eligible employer.

An eligible employer experienced one of the following:

  • Was required by the government to fully or partially suspend trade or business during a calendar quarter due to COVID-19.
  • Experienced significant decline in gross receipts in a quarter of 2020 when compared to the same quarter in 2019. A significant decline is defined as gross receipts being less than 50%.
  1. Understand what qualifies as wages.

If an employer is above 100 full-time employees in 2019, qualified wages are those paid to an employee for the time the employee is not providing services.

If the employer is below 100 full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship.

Qualified wages also include qualified health plan expenses that are properly allocated over the wages.

Get our payroll tracking for COVID-19 tool now.

COVID-19 Payroll Frequently Asked Questions
There is much to consider when it comes to the impact of these relief provisions on your payroll. Here are common questions we’ve received.

May an eligible employer receive both the tax credit for qualified wages under the FFCRA and the employee retention credit under the CARES Act?
Yes, but not for the same wages. The amount of qualified wages for which an eligible employer may claim the employee retention credit does not include the amount of qualified sick and family leave wages for which the employer received tax credit under the FFCRA. To learn more, visit the IRS website.

How can I stack the various relief options to ensure I’m getting the maximum opportunity through FFCRA and CARES? How do I track this in my payroll software?

There are options to stack various provisions, but you must do it in the right way.

Once you figure out what relief provisions you can use together, you’ll need to do the following related to the FFCRA:

  • Account for the tax credit and the journal entries for your company.
  • Calculate your healthcare cost by finding out an average daily amount per employee. The amounts we are looking at are employer amounts and pretax employee deductions. You would look at the annual premiums and divide by total number of employees on the plan.

The amount of qualified health plan expenses taken into account in determining the credits generally includes both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions.

However, qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.

As a reminder, the average annual premium equals the annual premium for employees covered under the policy divided by the number of staff members.

The average annual premium is divided by the average number of work days during the year, which is 260 days (52 weeks x 5 days). Calculations for seasonal or part time should be adjusted accordingly.

Example 1 – FFCRA Wages
FFCRA wages ($5333.33) and regular wages ($120,000) are paid out for this payroll. Payroll taxes would be withheld from the employee’s payroll checks. Remember that the FFCRA is exempt from employer Social Security tax.

The federal tax payment would be $43,912. However, since you are taking the tax credit (which ends up being income on your journal entry), you only pay into EFTPS in the amount of $37,701.33.

EFTPS withholding

Your calculations and journal entries will be more complex the more you use various components of the relief provisions. We’ve developed a tool to help.

How do I account for unemployment in my payroll?
For many organizations, tough conversations are being had around staffing. Specifically, how do they move forward amidst disruption and what kind of staffing do they need?

Organizations are choosing from a few options when it comes to adjusting their staffing: furloughs, layoffs or reduced hours. It’s important to understand the difference and how it can impact your payroll.

Furlough vs. Layoff vs. Reduced Hours

REDUCED HOURS:

  • Employers may reduce the hours of employees to meet business needs.
  • Employees may collect unemployment insurance.
  • Employees may keep employment benefits such as health insurance during the pandemic even if they no longer work the hours required to be eligible. Employers should check with their benefit providers to see what options are available.

FURLOUGH:

  • Temporary suspension from work where the intent is to have an employee return to their job at a point in the future.
  • Employees are not paid during the furlough and may collect unemployment.
  • Employees may keep employment benefits such as health insurance. Employers should check with their benefit providers to see what options are available.
  •  Employees are ordered NOT TO DO ANYTHING work-related while on furlough. Access to company email or systems should be suspended.
    • If an exempt employee responds to a phone call, email, etc. the employer must pay them for the day and may be required to pay them for the week
    • If a non-exempt employee performs any work, the employer must pay them for any time worked.
      Either of these situations will make collecting unemployment messy for the employee.

LAY-OFF:

  • Termination of employment.
  • Employees are able to collect unemployment.
  • Workers may continue benefit coverage through COBRA (similar to workers who resign or are terminated).

Another key consideration as you look at furloughing staff is the additional fees for not offering benefits such as health insurance. However, if you do offer health insurance and the employee is staying on, the employee can either pay the insurance back when they return, write a check to the employer for their portion of the health insurance or employers can choose to pay the employees portion as long as it is not discriminatory towards only highly compensated employees.

Document and Prepare Now

Having the proper payroll setup and documentation is key to compliance during this critical time. Know what’s required, track relief provisions correctly and be prepared to provide an answer to how you arrived at that particular amount. Your payroll processes will be crucial as you navigate through COVID-19 and its related implications.

 


Ensure you’re properly documenting items when it comes to payroll.

 

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