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:
Knowing how these provisions impact your payroll will be vital in ensuring accurate payroll 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 employees 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.
Frequently Asked Questions
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.
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)|
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.
The IRS has stated you must keep records for at least four years. These records include:
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.
As a reminder, you cannot take the employee retention credit if you took the PPP funding.
How do the different relief provisions compare?
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:
What Payroll Taxes Can be Postponed?
Generally, the payroll taxes that can be deferred to 2021 and 2022 include:
Taxes that were due to be submitted on March 27, 2020, or later are eligible for deferral. There is no maximum amount of qualifying payroll taxes that can be deferred.
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 deferral.
Who Cannot Defer Payroll Taxes?
The payroll tax deferral is not available to employers that have debt forgiven under the Small Business Administration’s Paycheck Protection Program or the United States Treasury Program Management Authority. But that doesn’t exclude employers who have applied and received PPP funds from being able to defer the employer portion of Social Security. Payroll taxes can continue to be deferred until the point they received a decision from their lender that its PPP loan is forgiven. At that point, the employer is no longer able to defer additional payroll taxes, and the payroll taxes that were deferred until that time continue to be deferred and will be due on the applicable dates described above.
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 to Reconcile Your Payroll with Postponed Payroll Tax Payments
To begin, reconcile your payroll with each payroll process:
Frequently Asked Questions
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 employees.
The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.
What to Do
An eligible employer experienced one of the following:
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.
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:
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 employees.
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.
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
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.
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