Explanation of the Changes to The Employee Retention Tax Credit in The New COVID Relief Bill

The Employee Retention Credit (ERC) of 2020 has been extended to 2021. This article gives a concise explanation of those changes to The Employee Retention Tax Credit in the new COVID Relief Bill. The new bill makes changes to Section 206 of Division NN of the CARES Act. These changes are made RETROACTIVE to March 12, 2020, and do NOTHING to change the computational aspects of the credit. 

Rather, Section 206 opens the Employee Retention Credit (ERC) – for 2020 AND 2021 – to borrowers of a Paycheck Protection Program (PPP) loan, and walks through how a PPP borrower retroactively claims the credit for 2020.

Then, you’ll want to devote some time to reading this. It’s a detailed analysis of the original ERC as enacted by the CARES Act, and walks through the computational aspects of the credit as they existed before last week, and as they CONTINUE to exist for 2020. This analysis will be vital to your understanding of the changes made to the ERC FOR 2021 ONLY by Section 207 of the latest relief bill. It is these changes that are the subject of this article.

Assuming you are familiar with the above linked article, break down a section of the new Act – this time Section 207 – paragraph by paragraph.

Extension of The Employee Retention Credit Program 

First, please read this recap of the differences between the 2020 and 2021 Employee Retention Credit

ERC Expansion	ERC Round 1 3.12.2020 – 12.31.2020	ERC Round 2 1.01.2021 – 6.30.2021
Co-exist w/PPP loan?	Yes, but not on the same exact wages	Yes, but not on the same exact wages
Eligible compensation base	$10,000 per year per employee	$10,000 per quarter per employee
Rate of credit	50% of eligible credit wages	70% of eligible credit wages
Maximum amount of credit	$5,000 per year per employee	$7,000 per quarter per employee
Maximum credit per year	$5,000 per year per employee (2020)	$14,000 per year per employee (2021)
Eligibility	Gross receipts (GR) drop-or-full or partial suspension	Same as 2020
Initial gross receipts drop	Gross receipts drop > 50%from same quarter in 2019. Example: 2Q 2020 had drop in GR of 52% compared toGR of 2Q 2019	ERC eligible for quarter if gross receipts drop > 20% from same quarter in 2019. Election to use prior quarter’s gross receipts: [Safe harbor]. Look at previous quarter and compare it to same quarter in 2019 (to see if gross receipts drop by > 20%). Example: For 1Q 2021, look to 4Q 2020 & compare to 4Q 2019 (to see if GR drop)
Duration of qualification	Thru quarter after drop by <20% of gross receipts (GR). Example: 2Q 2020 drop in GR of 52% cf to GR of 2Q 20193Q 2020 GR drop only 17%ERC eligible Q2 and Q3 2020	For quarter of qualification and any other quarter qualify for
Availability of credit for employers not in existence for part or all of 2019	No	For any calendar quarter, if employer not in existence at beginning of same calendar quarter in 2019, substitute 2020 for 2019
“Gross receipts” ERC wage range	Entire quarter for which qualify	Same as for 2020
Full or partial suspension	Operations suspended due to order from govt authority limiting commerce, travel or group meetings (commercial, social, religious or other)	Same as 2020
“Full or partial suspension” ERC wage range	ERC for wages only during time of suspension	Same as 2020
Do ERC wages include raises or bonuses (in excess of pay rate in place > 30 days prior to beginning of quarter)?	Yes –If had 100 (or <) FTEs in 2019, all wages count as ERC wages.No –If > 100 FTEs in 2019, ERC wages do not include such pay raises or bonuses	Yes –Pay raises and bonuses, if reasonable in amount, count as ERC wages (regardless of number of FTEs), subject to $10,000 per quarter per employee cap
Comp cost = Wages + employer funded health plan (excluded for employee)	Yes	Yes
Group health plan expenses count even if no wages	Retroactively, yes	Yes
Wages count for ERC if not funded by forgiven PPP loan	Yes, but not on same exact wages	Yes
In allocation of wages, which tax break comes first?	ERC first, PPP second	ERC first, PPP second
All employers, both large and small, qualify for ERC	Yes	Yes
Small employer (ERC for pay to all employees, currently working or not)	Up to 100 monthly (2019) FTE employees (FTE = 30 hours/week)	Up to 500 monthly (2019) FTE employees
Large employer (ERC only for pay to employees not currently working)	Exceeding 100 monthly (2019) FTE employees	Exceeding 500 monthly (2019) FTE employees
Advance ERC Available	No – amend form 941	Yes –For employers w/ not> 500 FT employees (employed in 2019) (30/hours week = full time)
When available	N/A	Advance credit obtainable as quarter begins
Amount of advance credit	N/A	Up to 70% of average quarterly wages in 2019 (2020 if employer no existed in 2019)
How advance credit obtained	N/A	Form 7200
Recovery if advance too high	N/A	Increase in employment tax for quarter

And now …. the ERC 

Section 207 doesn’t wait long to do what it’s designed for: Section 207(a)(1) extends the ending date for the ERC from December 31, 2020 to June 30, 2021.

Remember and take note, that the purpose of changes to Section 206 of the Act were to expand the eligibility rules for the ERC to include borrowers of a PPP loan. Those changes – and only those changes – were retroactive to March 12, 2020. The computational changes we will discuss throughout this article only apply from January 1, 2021 through June 30, 2021; they are NOT retroactive to 2020.

Computational Changes from 2020 to 2021 

Let’s take a look at what’s new for 2021, and how those rules compare to the rules for 2020.

Percentage of credit allowed

Old: For 2020, Section 2301(a) of the CARES Act allowed an employer to claim a credit of 50% of qualified wages.

New: For 2021, Section 207(b) amends Section 2301(a) of the CARES Act and increases the credit percentage from 50% to 70%.

Wages capped at $10,000 per covered period vs per quarter

Old: For 2020, Section 2301(b)(1) of the CARES Act capped the “qualified wages” that could be paid to any one employee at $10,000 for ALL quarters.

New: For 2021, Section 207(c) amends Section 2301(b)(1) of the CARES Act and increases the maximum amount of creditable, qualified wages to $10,000 for ANY quarter. Thus, in 2020, if A were paid $10,000 in Q3 and $10,000 in Q4, the resulting credit would be $5,000 (capped at 50% of $10,000 in wages TOTAL). In 2021, however, if A were paid $10,000 in Q1 and $10,000 in Q2, the resulting credit would be $14,000, 70% of $10,000 wages for EACH QUARTER).

Qualifying Factors

Old: To be eligible for a credit, an employer needed to experience at least one quarter in 2020 in which 1) operations were fully or partially suspended by government order, or 2) the business experienced a precipitous drop in gross receipts. More specifically, Section 2301(c)(2)(A)(ii)(II) provided that the latter requirement was met if during 2020, the business experienced a quarter in which gross receipts were less than 50% of the receipts in the same quarter in 2019. From that point on, every subsequent quarter was also an eligible quarter until the END of the first quarter in which gross receipts exceeded 80% of the receipts from the same quarter in 2019.

New: Section 207(d)(1) makes significant changes to the gross receipts test of Section 2301(c)(2)(A)(ii)(II). For 2021, the test is satisfied for any quarter of the first half of 2021 in which gross receipts is less than 80% of the same quarter in 2019. Thus, in the first quarter of 2021, a business would compare its receipts in that quarter to the first quarter of 2019, NOT the first quarter of 2020. The comparison to 2019 rather than 2020 makes a lot more sense when we move on to Q2 of 2021, because in all likelihood, gross receipts for Q2 of 2019 will be significantly higher than those of Q2 of 2020, such that a comparison to 2019 will make it much easier to establish an eligible quarter.

Do new businesses qualify for the employee retention credit?

If, however, a business did not exist at the beginning of the same quarter of 2019, the same quarter in 2020 is substituted.

Section 207(d)(2) then gives businesses – for 2021 only – the option to elect to satisfy the gross receipts test by looking at the immediately preceding calendar quarter, and comparing that quarter to the corresponding quarter in 2019. To illustrate, an employer who could not satisfy the gross receipt test in Q1 of 2021 could nonetheless have an eligible quarter for that stretch of time by electing to compare gross receipts in Q4 of 2020 to Q4 of 2019. If there is a drop of more than 20% quarter-over-quarter, Q1 of 2021 will be an eligible quarter. At this time, it is not clear if the election is permanent; requiring the employer to then determine whether an eligible quarter exists for Q2 of 2021 by looking to Q1 receipts, but that seems illogical, as in the example above, had Q1 been an eligible quarter in its own right, the need would not have arisen to make the election for that quarter. In all likelihood, the election will be made quarter-by-quarter.

Qualified Wages

Old: For 2020, under Section 2301(c)(3)(A) of the CARES Act, the definition of “qualified wages” hinged on whether the business had more than 100 full-time equivalent employees in 2019 as determined under Section 4980H. If the business had MORE than 100 FTEs, only wages paid to employees not to provide services (NOT to work, but to remain employees of the company) during an eligible quarter were “qualified wages.” If the business had fewer than 100 FTEs, however, then ALL wages paid to employees during an eligible quarter (or eligible part of quarter if the business were only shut down for a portion of the quarter) were “qualified wages.”

New: For 2021, Section 207(e) increases the threshold number of employees before a change in treatment arises from 100 to 500. Importantly, Section 207(e)(2) then strikes Section 2301(c)(3)(B) of the CARES Act, which had previously capped qualified wages paid to any one employee at what the employee would have been paid for working an equivalent duration during the 30-day period immediately before the eligible quarter in which wages were paid. Stated in English, this rule prevented an employer from artificially inflating the ERC by increasing pay to an employee during an eligible quarter. That rule no longer exists, meaning an employer could pay bonuses to an employee and increase the credit, subject to the $10,000 per quarter cap, of course.

The Employee Retention Tax Credit is different from the Covid-19 Paid Sick Leave tax Credit. Read about the Paid Sick Leave Tax Credit Here

New Rules for 2021 

Section 207(g) then adds an entirely new component to the ERC regime for 2021: the ability for small employers to receive the credit – which is typically taken by reducing required payroll tax deposits — in ADVANCE.

It works like so: if an employer has fewer than 500 FTEs, it may elect for any calendar quarter to receive an advance payment of the credit for that quarter in an amount not to exceed 70% of the average quarterly wages paid by the employer in 2019.

As one would expect, the advance credit would then need to be reconciled against the actual credit, a process we’ve gotten used to with the premium tax credit received when acquiring health insurance on a state exchange. If the advance payments end up exceeding the actual credit due, the employer’s payroll tax is increased for the calendar quarter by the excess.

Let’s look at two examples to illustrate how the computational aspects of the law change from 2020 to 2021.

Example: Employee Retention Credit in 2020

In 2020, X Co. has gross receipts for Q2, Q3 and Q4 of $100,000, $120,000 and $150,000. In 2019, X Co. had gross receipts for Q2, Q3 and Q4 of $210,000, $155,000 and $180,000. Gross receipts in Q2 dropped by more than 50% when compared to Q2 of 2019, and were then at 77% for Q3 and 83% for Q4. Because eligible quarters for 2020 start once receipts drop by more than 50% and continue until the END of a quarter in which receipts exceed 80% of the receipts for the same quarter in 2019, each quarter is an eligible quarter. X Co. has fewer than 100 FTEs, and during those quarters, paid salary to employees in the following sums:

Employee	2020 Q2	2020 Q3	2020 Q4
A	$8,000	$7,000	$10,000
B	$12,000	$10,000	$11,000
C	$4,000	$4,000	$4,000
D	$2,000	$2,000	$2,000

In Q2, X Co. has $24,000 in qualified wages ($8,000 + $10,000 + $4,000 + $2,000). B is topped out and disqualified for the rest of 2020, because in 2020, the maximum amount of qualified wages for any one employee is $10,000 for ALL quarters.

In Q3, X Co. has $8,000 in qualified wages ($2,000 + $0 + $4,000 + $2,000). A is now topped out and disqualified for the rest of 2020.

In Q4, X Co. has $4,000 in qualified wages ($0 + $0 + $2,000 + $2,000). C was topped out during the quarter.

The total credit is $18,000 (50% * $36,000).

Example: Employee Retention Credit in 2021

In 2021, X Co. has gross receipts in Q1 of $140,000 in Q1 and Gross receipts in Q1 and Q2 of 2019 were $180,000 and $210,000 respectively. Because gross receipts for each of Q1 and Q2 in 2021 were less than 80% of the receipts for the same quarters in 2019, both quarters are eligible quarters. During Q1 and Q2, X Co. paid its employees as follows:

Employee	2021 Q1	2021 Q2
A	$8,000	$7,000
B	$12,000	$14,000
C	$4,000	$4,000
D	$6,000	$6,000

In Q1, X Co. has $28,000 in qualified wages ($8,000 + $10,000 + $4,000 + $6,000).

In Q2, X Co. has $27,000 in qualified wages ($7,000 + $10,000 + $4,000 + $6,000). As opposed to 2020, B has eligible wages even after being paid $10,000 in a previous quarter, because the limit is now $10,000 per employee PER QUARTER.

The total credit is $38,500 (70% * $55,000). The credit is DOUBLE what it was for 2020, despite the fact that 2021 has only two qualifying quarters, while 2020 had three.

Three big Employee Retention Credit changes from 2020 to 2021

There are three big changes to note that took effect when the calendar moved from 2020 to 2021:

First Change

If Section 207 of the Act had not changed the law, Q1 of 2021 would NOT have been an eligible quarter for X Co. In Q4 of 2020, gross receipts exceeded 80% of the receipts for Q4 of 2019; thus, in order to “restart” a run of eligible quarters, gross receipts for Q1 of 2021 would have needed to be less than 50% of the receipts for Q1 of 2019, which was not the case. Section 207 provides that for 2021 only, however, to be an eligible quarter, the gross receipts must be less than 80% of the receipts for the same quarter in 2019. Because that was the case for both Q1 and Q2 of 2021, both quarters are eligible quarters.

Second Change

The change in the limit on qualified wages is hugely impactful. In 2020, the cap was $10,000 per employee for ALL quarters, causing A, B and even C to eventually have their wages capped out. Fast forward to 2021, however, and the limit increases to $10,000 per employee for ANY quarter; as a result, only B is subject to any limitation at all (both quarters).

Third Change

Section 207 of the Act increases the credit rate from 50% to 70%. It is worth noting that if X Co. were so inclined, it could elect to receive the 2021 in advance, up to 70% of the average quarterly wages for 2019.

Let’s take a look at one other example to drive home the consequences of a different change in the computational aspect of the law from 2020 to 2021:

Example. Employer P is a local chain of full-service restaurants in State X that averaged 250 FTEs in 2019. State X forced P to discontinue sit-down service to customers for Q2 and Q3 of 2020. P continues to pay its kitchen staff to come in and prepare food every day. It also pays its wait staff to stay at home and not work. Even though P had its operations partially suspended, because P has more than 100 FTEs for 2019, only those wages paid to employees NOT TO WORK are eligible for the credit. The amount P pays its kitchen staff to cook are not eligible for the ERC. The wages paid to the wait staff, however, are eligible wages.

Fast forward to 2021…

And the wages paid to BOTH the wait staff and the kitchen staff are eligible wages, because beginning in 2021, the change in treatment of wages does not kick in until P has more than 500 FTEs.

For all of 2021, borrowers of a PPP loan –either an original loan or a second round of borrowing are eligible to claim an ERC credit. But careful consideration is necessary to ensure that wages are not duplicated – i.e., both eligible for the ERC and forgiven as part of the PPP process – and that the tax benefits from both programs are maximized.

Changes to the ERC: Treatment of Taxpayers who Originally Borrowed PPP Loans and Were Barred from Claiming the ERC

If we were going to summarize in one sentence what Section 206 of the Act endeavors to accomplish, it would be this: “All of you who borrowed a PPP loan can now go back and claim the ERC for 2020.”

That’s it; that’s all. But implementing that idea is easier said than done, primarily for this reason: the backbone of both the PPP and ERC is payroll costs: PPP loans must be spent primarily on payroll in order to be forgiven, and as we just learned, the ERC is predicated on qualified wages.

The problem that arises, then, is an obvious one. Congress will let us have BOTH the PPP and ERC for 2020, but not on the same dollars of payroll costs. And it’s the safeguards that are necessary to prevent double dipping that makes Section 206 of the Act – should you dare to read it – so cumbersome.

The recent Federal Stimulus Package is covered in more details in this article. We cover the new PPP changes in depth. Check it out.

No More Prohibition on Claiming BOTH the PPP and ERC

Let’s start with the biggest news first: Section 206(c)(2)(B) strikes Section 2301(j) from the CARES Act. Section 2301(j) had previously provided that “if an eligible employer receives a covered loan under paragraph (36) of section 7(a) of the Small Business Act (a PPP loan), such employer shall not be eligible for the credit under this section.”

With that gone, the next question is one of effective dates: at what point was Section 2301(j) removed from the CARES Act? Section 206(e) provides that, in general, the amendments made by this section take effect as if included in the provisions of the CARES Act to which they relate. Thus, it certainly appears that PPP borrowers are now eligible for an ERC back to the beginning of the program – March 12, 2020. It’s just a matter of how to claim that credit.

Treatment of Allocable Health Care Costs

Section 206(b) reorganizes Section 2301 of the CARES Act, and as we’ll discuss later, this drafting may cause a problem for certain taxpayers. This section begins by striking Section 2301(c)(3)(C), which had previously included in the definition of “qualified wages” eligible for the ERC the allocable share of qualified health plan expenses paid to an employee along with the qualified wages.

That does NOT mean, however, that a taxpayer claiming the ERC no longer gets to increase qualified wages by allocable health care costs. Instead, Section 206(b)(2) then MOVES the former Section 2301(c)(3)(C) to Section 2301(c)(5)(B). More importantly, it changes the language in this section to align with the favorable interpretation by the IRS that allocable health care costs are eligible for the credit EVEN IF no wages are paid to the employee; i.e., an employee is on furlough. The previous language in Section 2301 required wages to be paid to an employee before health care costs could be allocated to the wages and a credit claimed against them. That is no longer the case.

Section 2301(c)(5)(A) will now read: “In general, the term wages means wages (as defined in section 3121(a) of the Internal Revenue Code of 1986) and compensation (as defined in section 3231of such Code), and

Section 2301(c)(5)(B) will now add to the definition of wages in (c)(5)(A) allocable health care costs.

In summary, the inclusion of health care costs in qualified wages has been moved from Section 2301(c)(3)(C) to Section 2301(c)(5)(B). Stick that in the back of your brain; it will matter soon.

Coordination between PPP and ERC

Now that Section 2301(j) has been removed from the CARES Act and PPP borrowers can claim the ERC, we’ll need some ground rules to avoid claiming a credit and forgivable expenses for the same amounts.

Section 206(c)(1) amends Section 7A(a)(12) of the Small Business Act, which was formerly Section 1106 of the CARES Act. This new Section 7A(a)(12) – after amendment by the PPP provisions of the latest bill – includes in forgivable PPP expenses “payroll costs” as defined in Section 7(a)(36) of the Small Business Act. Section 206(c) amends the definition of forgivable PPP payroll costs by adding, “Such payroll costs shall not include qualified wages taken into account in determining the credit allowed under Section 2301 of the CARES Act or qualified wages taken into account in determining the credit allowed under subsection (a) or (d) of section 303 of the Taxpayer Certainty and Disaster Relief Act of 2020.”

The ordering rule of payroll costs

Stated in another way, this Section 206(c) established an important ordering rule: any payroll costs – W-2 wages or health care costs – for which a taxpayer claims an ERC (or a new disaster ERC as allowed by the latest bill) are NOT eligible to be forgiven as part of the PPP process. Thus, while a taxpayer may BOTH claim the ERC and borrow a PPP loan, they cannot do it on the SAME wages or health care costs, and the priority goes to the ERC rather than the PPP.

Under Section 206(c)(2), Section 2301(g)(1) will now allow a taxpayer to elect to not include certain wages and allocable health care costs in the computation of the ERC credit. Clearly, this would be done so as to preserve those costs for PPP forgiveness.

Section 2301(g)(2) is then further amended to require the SBA to issue guidance providing that if a taxpayer elects under Section 2301(g)(1) to count wages for PPP forgiveness rather than the ERC credit, if it turns out that PPP payroll costs are NOT forgiven, the payroll costs can STILL be treated as qualified wages for purposes of the ERC.

Putting it all together 

Assume a taxpayer borrowed $100,000 as a PPP loan on April 3, 2020. During the second and third quarters of 2020, the taxpayer has “eligible quarters” and is thus eligible for the ERC. Over the 24-week covered period, the taxpayer spends $80,000 on W-2 wages and qualified health care costs and $20,000 on rent. Included in those wages are $40,000 of qualified wages eligible for the ERC. The taxpayer would rather have the $40,000 in payroll costs forgiven than claim an ERC on those amounts. The general rule of new Section 7A(a)(12), however, provides that the $40,000 of qualified wages are eligible for the ERC, and are NOT eligible to be forgiven.

The election

The taxpayer may then elect, however, under Section 2301(g)(1) to treat the $40,000 of qualified ERC wages as “payroll costs” for purposes of PPP forgiveness. If the loan is fully forgiven, no ERC can be claimed on the $40,000 of wages. It appears, however, that if the loan is eventually not forgiven, Section 2301(g)(2) and future guidance from the SBA will allow the $40,000 of qualified wages to revert BACK to the ERC and be eligible for the credit.

And for those PPP borrowers who have not yet applied for forgiveness, do we now have ANOTHER factor to consider? If a borrower has enough “payroll costs” to satisfy both the ERC and PPP programs, can they have their cake and eat it too?

For example, assume a taxpayer borrowed $100,000, but in the 24-week covered period that also comprised eligible quarters, incurred $180,000 of W-2 and payroll costs, with $50,000 of the costs also meeting the definition of “qualified wages” for the purposes of the ERC. Even with the general rule that the $50,000 of qualifies wages are not forgivable PPP costs, the taxpayer would still have $130,000 of forgivable payroll costs; more than enough to achieve full forgiveness.

Understanding “Qualified Wages”

But you can see where this is heading: very few business owners bothered to understand the concept of “qualified wages” because once the business got its hands on a PPP loan, the ERC was not available. But now, with the ERC being brought back for 2020 even for PPP borrowers, it is necessary for every borrower to quickly get a handle on 1) whether they had an “eligible quarter” for ERC purposes during 2020, and then 2) quantify the “qualified wages” so as to make a determination whether those wages are better utilized in claiming an ERC or forgiven as part of the PPP, or if they have enough total payroll costs to get the best of both worlds.

OK, Great. But how do we Claim the Retroactive Credit?

Allowing PPP borrowers to claim the ERC doesn’t mean a whole lot if we don’t understand 1) when the changes are effective, and 2) if the changes are retroactive, how the taxpayer claims the retroactive benefits.

Clearly, the changes are intended to be retroactive. To that end, as discussed previously, Section 206(e) provides a general rule that ALL the changes above are to be implemented as if they were part of the initial CARES Act passed in March of 2020. That would, of course, seem to mean that PPP borrowers can still claim the credit for the past nine months. But how? Those credits, which would have reduced payroll tax deposits or generated a refund on Form 7200, would have been claimed as part of payroll tax filings over the previous three quarters. What can be done now?

The logical conclusion is that this is intended to be simple: every business owner can go back, review 2020 for eligible quarters and qualified wages, decide which costs to leave out of the PPP forgiveness or whether to elect to move the costs from the ERC to the PPP, and then claim the credit on the final eligible costs, presumably by filing amended Forms 941X for the 2^nd and 3^rd quarters of 2020. That makes sense, right?

Source: Forbes

California Law Updates and California Minimum Wage Updates (2021)

Several new or amended employment laws take effect in California on January 1, 2021, including mandatory child abuse reporting, expanded crime victim leave, and increased minimum wages and exempt employee salaries.

California Law Update: Mandated Reporting Training

Employees who supervise and directly interact with minors, as well as “HR employees,” have been added to California’s list of “mandated reporters.” However, these employees are only mandated reporters if the organization has five or more employees and employs at least one minor. Mandated reporters are obligated to report known or suspected child abuse and neglect, and/or sexual abuse, to any of several state or county agencies. Failure to report is a crime.

HR employees are defined as the employee or employees designated by the employer to accept any complaints of misconduct. This means that if your harassment or complaint policy directs employees to report acts of discrimination or harassment to their manager or supervisor, the CEO, a Board member, or any other non-HR person, that person is now a mandated reporter under the law.

Employers of these newly mandated reporters must provide them with training on identifying and reporting child abuse and neglect. The state provides compliant online trainings here. Time spent taking the training is considered hours worked and must be paid.

Employers must also collect a signed acknowledgment form related to these duties from each employee who is a mandated reporter. A template is available here.   

The law does not say when the training must be completed, but since the duty to report takes effect immediately on January 1 and failure to report can have significant penalties, we would recommend training current employees as soon as possible and including this training as part of any new “HR employee” onboarding.

California Law Update: Crime Victim Leave

Previously, employers of all sizes were required to provide job-protected leave to victims of stalking, domestic violence, and sexual assault. That law has now been amended to include victims of any crime that caused physical or mental injury or a threat of physical injury. The law entitles employees who are victims to take time off from work to “obtain any relief.” This includes, but isn’t limited to, taking steps to ensure their or their child’s health, safety, or welfare, such as by trying to get a restraining order.

In this California law update, employees are also entitled to leave if their family member has died because of a crime. For purposes of this law, “family member” includes children, parents, spouses, and siblings as well as anyone who has an equivalent close association with the employee. See the laws page in the HR Support Center for a full list of family members.

As with the current crime victim leave law, employers may require reasonable advance notice of the need for leave, if notice is feasible, and if the employee isn’t able to give advance notice, the employer can require documentation. However, the law now states that a signed statement from the employee that their absence was for a covered reason is acceptable documentation.

Finally, employers with 25 or more employees are now required to provide leave to all crime victims for reasons similar to those previously required only for sexual assault and domestic abuse victims (e.g., medical attention, counseling, safety planning).

Employers should update their policies to ensure these changes are incorporated.

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California Law Update: California Family Rights Act Reminder

As we reported in September, significant amendments to the California Family Rights Act (CFRA) take effect on January 1. Most notably, CFRA will apply to employers with five or more employees.

CFRA requires covered employers to provide up to 12 weeks of unpaid, job-protected leave to eligible employees for certain reasons, such as baby bonding. Additional details can be found on the HR Support Center by typing “CFRA” into the search bar.

To be compliant with this California law update, employers are required to post a notice about employees’ CFRA rights. A compliant notice will be provided by the Department of Fair Employment and Housing (DFEH), but it has not updated the current CFRA notice with the new information yet. We recommend checking the DFEH website periodically; we expect it will be available before January 1.

California Law Update: Pay Data Reporting

Beginning next year, employers with 100 or more employees will need to report pay data annually to the Department of Fair Employment and Housing (DFEH). The first deadline is March 31, 2021. The DFEH has created an extensive FAQ that is available here, and additional guidance will be provided by regulations released in the new year. 

Minimum Wages and Salaries

California Minimum Wage: Statewide Minimum Wage 

On January 1, California’s minimum wage will increase to $14 per hour for employers with 26 or more employees and $13 per hour for employers with 25 or fewer employees.

For 2020 and the next three years, the state-wide minimum wage will be as shown in the table below:

Effective Date	Employers with 25 of Fewer Employees	Employers with 26 or More Employees
January 1, 2020	12.00	13.00
January 1, 2021	13.00	14.00
January 1, 2022	14.00	15.00
January 1, 2023	15.00	15.00

California Minimum Wage: Exempt Employee Minimum Salaries and Wages

The California minimum salary threshold for exempt employees will increase to $1,120 per week ($58,240 per year) for employers with 26 or more employees, and $1,040 per week ($54,080 per year) for employees with 25 or fewer employees.

The minimum rate for exempt computer software employees will increase to $47.48 per hour.

The minimum rate for exempt licensed physicians and surgeons paid on an hourly basis will increase to $86.49 per hour.

California Minimum Wage: Local Minimum Wages

The minimum wage will also increase in the following cities:

Item 1	Locality/City	Minimum Wage in USD
1	Belmont	15.90
2	Burlingame	15.00
3	Cupertino	15.65
4	Daly City	15.00
5	El Cerrito	15.61
6	Half Moon Bay	15.00
7	Hayward (26 or more employees)	15.00
8	Hayward (25 or fewer employees)	14.00
9	Los Altos	15.65
10	Menlo Park	15.25
11	Mountain View	16.30
12	Novato (100 or more employees)	15.24
13	Novato (26–99 employees)	15.00
14	Novato (1–25 employees)	14.00
15	Oakland	14.36
16	Palo Alto	15.65
17	Petaluma	15.20
18	Redwood City	15.62
19	Richmond	15.21
20	San Carlos	15.24
21	San Diego	14.00
22	San José	15.45
23	San Mateo	15.45
24	Santa Clara	15.62
25	Santa Rosa	15.20
26	Sonoma (26 or more employees)	15.00
27	Sonoma (25 or fewer employees)	14.00
28	South San Francisco	15.24
29	Sunnyvale	15.24

California Stimulus Package Details

The California stimulus package to help struggling businesses in the state has been launched by Governor Newsom. It includes the California Rebuilding Fund, California Hiring Credit, and California Small Business Grant Fund.

California Rebuilding Fund

California Stimulus Package – Low Interest Loans for Small Business

The California Rebuilding Fund offers up to $100,000 and is separate and different than the Federal EIDL and PPP Loan programs. Loans offer a fixed 4.25% interest rate over 36-60 months. Eligible businesses must employee 50 or fewer employees, had gross revenues less than $2.5 million in 2019, must have suffered economically as a result of COVID-19, and must meet other operating criteria.

Applicants must submit a pre-application online. The CRF will review your application. Once matched with a lender, you will receive an email or call to begin the full loan application process.

California Hiring Tax Credit

California Stimulus Package – Main Street Small Business Tax Credit

The (California) Main Street Small Business Tax Credit was enacted with State Senate Bill 1447. This bill provides financial relief to small businesses who have faced economic disruptions and job losses in 2020. Taxpayers can apply a small business hiring credit against California State Income Taxes – OR – a credit for Sales and Use taxes. However, the tax credits are limited and business employers must apply for a tentative credit reservation. Funds are limited, and therefore, not all businesses will be allowed a tax credit.

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California Small Business Grant Fund

As part of the California Stimulus Package, the government has set aside $500 million for the creation of a small business grant fund. This grant will be available through the California Office of the Small Business Advocate (CalOSBA). The amount of grant funding ranges from $5,000 to $25,000. Businesses are eligible based on their annual revenue as documented in their most recent tax return and Non-profit organizations are also eligible.

Eligible Businesses Annual Revenue	Grant Amount Available Per Business
$1,000 to $100,000	$5,000
Greater than $100,000 up to $1,000,000	$15,000
Greater than $1,000,000 up to $2,500,000	$25,000

Eligibility

A small business or small nonprofit must satisfy the following criteria to be eligible to receive a grant award:

1. 1Must meet the definition of an “eligible small business”. An “eligible small business” means (i) a “small business” (sole proprietor, independent contractor, 1099 work, and or registered “for-profit” business entity (e.g., C-corporation, S-corporation, limited liability company, partnership) that has yearly gross revenue of $2.5 million or less (but at least $1,000 in yearly gross revenue) based on most recently filed tax return) or (ii) a “small nonprofit” (registered 501(c)(3), 501(c)(19), or 501(c)(6) nonprofit entity having yearly gross revenue of $2.5 million or less (but at least $1,000 in yearly gross revenue) based on most recently filed Form 990)
2. 2Active businesses or nonprofits operating since at least June 1, 2019
3. 3Businesses must currently be operating or have a clear plan to re-open once the State of California permits re-opening of the business
4. 4Business must be impacted by COVID-19 and the health and safety restrictions such as business interruptions or business closures incurred as a result of the COVID-19 pandemic
5. 5Business must be able to provide organizing documents including 2018 or 2019 tax returns or Form 990s, copy of official filing with the California Secretary of State, if applicable, or local municipality for the business such as one of the following: Articles of Incorporation, Certificate of Organization, Fictitious Name of Registration or Government-Issued Business License
6. 6Business must be able to provide acceptable form of government-issued photo ID
7. 7Applicants with multiple business entities, franchises, locations, etc. are not eligible for multiple grants and are only allowed to apply once using their eligible small business with the highest revenue

Ineligible Businesses

Businesses that do not qualify for this California Stimulus Package are:

1. 1Businesses without a physical location in California
2. 2Nonprofit businesses not registered as either a 501(c)(3), 501(c)(19), or 501(c)(6)
3. 3Government entities (other than Native American tribes) or elected official offices
4. 4Businesses primarily engaged in political or lobbying activities (regardless of whether such entities qualify as a 501(c)(3), 501(c)(19), or 501(c)(6)) 
5. 5Passive businesses, investment companies and investors who file a Schedule E on their personal tax returns 
6. 6Churches and other religious institutions (regardless of whether such entities qualify as a 501(c)(3), 501(c)(19), or 501(c)(6)) 
7. 7Financial businesses primarily engaged in the business of lending, such as banks, finance companies and factoring companies
8. 8Businesses engaged in any activity that is illegal under federal, state or local law
9. 9Businesses of a prurient sexual nature, including businesses which present live performances of a prurient sexual nature and businesses which derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature
10. 10Businesses engaged in any socially undesirable activity or activity that may be considered predatory in nature such as rent-to-own businesses and check cashing businesses
11. 11Businesses that restrict patronage for any reason other than capacity
12. 12Speculative businesses
13. 13Businesses of which any owner of greater than 10% of the equity interest in it (i) has within the prior three-years been convicted of or had a civil judgment rendered against such owner
14. 14“Affiliated” companies (as such term is defined in 13 C.F.R. § 121.103)
15. 15Multiple business entities, franchises, locations, etc. are not eligible for multiple grants and are only allowed to apply once using their eligible small business with the highest revenue

How to apply

PLEASE NOTE: This grant is not awarded by a first come, first served process. All applications have until January 13, 2021 to complete and submit their application.  Click the button below to begin working through the application process.

Tax Credit Extension for Paid Sick Leave

In the new $900B COVID Relief Bill, Tax Credits for Emergency Paid Sick Leave and EFMLA will be extended to March 31, 2021. The relief bill just became law. It answers the question of whether federal Emergency Paid Sick Leave (EPSL). It also stipulates that the Emergency Family and Medical Leave (EFMLA) will be extended. 

The answer is yes, but it’s an option, not a requirement. Here’s what employers need to know:

• Offering EPSL and EFMLA after December 31 will become optional for employers.  
• An employee will no longer be entitled by law to take EPSL or EFMLA, even if they have a qualifying reason. 
• Employers who choose to offer these paid leaves can still receive a tax credit if they follow the current EPSL and EFMLA rules, including job protection.
• The extension of the tax credit will be available for leaves taken through March 31, 2021.
• Employees will not get new hours to use—the unused portion of their original allotment that remains on January 1 is how much they will be able to use through March 31, 2021. For instance, if an employee who was entitled to 80 hours of EPSL between April 1 and December 31 used 40 of those hours in 2020, they’d have 40 hours left to use between January 1 and March 31, 2021.
• There is a possible exception when an employee’s EFMLA bank could reset if employers use the calendar year or another fixed FMLA tracking period that starts before March 31 and the DOL fails to readopt the regulations they wrote related to EFMLA. We expect the IRS, DOL, or both, to provide guidance soon that will clear up whether certain employers will need to offer additional hours. 

Extension of several other benefits from previous coronavirus-related legislation

The new law also extends or revives several other benefits from previous coronavirus-related legislation, some of which are listed below. Such legislation includes but not limited to the FFCRA and the PPP. 

These aspects of the law are outside the scope of our services, so we are unable to answer follow-up questions. 

Some of the notable provisions include:

• Individual payments of $600 for people with incomes at or below $75,000 and $600 per dependent child, with payments phased out for higher incomes
• A $300 weekly supplemental unemployment benefit, through March 14, 2021
• Extension of Pandemic Unemployment Assistance (for gig workers and the self-employed) and Pandemic Emergency Unemployment Compensation (for those who run out of state unemployment insurance benefits), through March 14, 2021
• Reopening and refunding of the Paycheck Protection Program (see your financial or tax advisor for additional information) 

We will keep you posted on future developments on the tax credit extension and clarifications as they become available.

NPR has a nice coverage of the details of this tax credit extension for your further reading. Check it out.

Federal Stimulus Package and the New PPP Changes

News of a Federal Stimulus Package and changes to the PPP is now official, offering some new financial relief tools to business, individuals, and specific sectors.

The State of California also offered new information and gateways to financial resources through the State. You can find more details on the state stimulus here.

Here is a breakdown by topic. Please read carefully:

Stimulus Payments to Families

The Federal Stimulus Package includes another round of nontaxable direct payments to qualifying individuals. Amounts of up to $600 for individuals and $1,200 for a married couple filing jointly, plus $600 for each dependent child under the age of 17 will be sent based on 2019 filing information.

Payments begin phasing out once adjusted gross income exceeds $75,000 for a single taxpayer and $150,000 for a married couple. As was the case with the first round of payments, this second payment represents an advance on a tax credit that will be reconciled on the 2020 tax filing.

Unemployment Benefits

The bill provides an additional $300 per week through March 14, 2021. Pandemic Unemployment Assistance (PUA) that expands unemployment benefits to self-employed and others in nontraditional employment was extended as well, with the maximum number of eligible weeks increased to 50 weeks.

An additional $100 of extra benefit may also be available for certain workers who have both wage and self-employment income. Unemployment compensation received is taxable income to the recipient.

PPP Loan Program Highlights

Small businesses have access to a new round of funding for PPP Loans. The Federal Stimulus Package could not be meaningful without improving the PPP Loans program of 2020. Therefore, the PPP Loan Program has been revised and updated. The revised program has the following major changes:

• The original PPP will reopen and become available through March 31, 2021
• Expenses paid for with forgiven PPP funds are now tax-deductible for all borrowers, even those who have already applied for forgiveness.
• Streamlined forgiveness for borrowers with loans under $150,000
• Businesses can now take a second PPP loan. See details below
• For borrowers who have not yet received forgiveness, four new types of expenses are eligible non-payroll uses of PPP funds and eligible for up to 40% of total forgiveness: certain operations costs such as software or cloud computing services or administrative costs, public disturbance related property damage/vandalism/looting costs not covered by insurance, covered supplier costs, and covered worker protection costs.
• Eligibility for the PPP Loan Program has been expanded to make the program accessible to more small businesses.
• Borrowers can choose any covered period beginning on the date a borrower receives the loan and ending on a date selected by the borrower during the 8 to 24 weeks after loan origination.
• The PPP Loan Program is now available to 501(c)(6) non-profit organizations. 
• PPP Loan Funds can be used in conjunction with Employee Retention Tax Credits.
• EIDL Grant funds will no longer reduce the amount of PPP loan eligibility.
• PPP forgiveness amounts will no longer be reduced by any Economic Injury Disaster Loan (EIDL) grant received.

Looking for answers to frequently asked questions regarding the second draw of the PPP? Read here.

Second PPP Loan

Businesses can take a second Paycheck Protection (PPP) Loan (up to $2 million) once a first round of PPP Loan funds have been exhausted. Borrowers must have fewer than 300 employees (down from 500). Additionally, the business must be able to establish a 25% drop in gross receipts during a quarter in 2020 relative to that same quarter in 2019. 

Usage of proceeds will follow the same protocol as round one loans. Consequently, loans will be equal to the lesser of 2.5 multiplied by average monthly payroll costs for the one-year period before the loan is made or calendar year 2019, or $2 million. The hospitality industry, however, will use a multiple of 3.5

For borrowers who have not yet received forgiveness, four new types of expenses are eligible non-payroll uses of PPP funds and eligible for up to 40% of total forgiveness.

1. 1Certain operations costs such as software or cloud computing services or administrative costs
2. 2public disturbance related property damage/vandalism/looting costs not covered by insurance
3. 3Covered supplier costs
4. 4Covered worker protection costs

EIDL Loan & Grant Highlights

The Economic Injury Disaster Loan Program is accepting applications (Apply here). The latest Federal Stimulus Package enables and offers some updates:

• The EIDL advance grant will again be available, allowing businesses who did not receive the full $10,000 advance to reapply for the difference.
• The EIDL advance will not be taxable and expenses paid with the funds will be tax deductible.
• The same is true for borrowers of traditional Section 7 SBA loans who had six months of their principal and interest paid under the CARES Act, with the bill requiring the SBA to pay an additional three to eight months beginning in February 2021.
• A non-taxable grant is now available for eligible shuttered venues, theaters, and museums as well. Such businesses include non-profit organizations

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Employee Retention Tax Credit Highlights

As part of the Federal Stimulus Package, the Employee Retention Credit (ERC) is extended to July 1, 2021. Businesses may now take the ERC and the PPP, but the wages used in computing the ERC are not forgivable costs under the PPP program.

Employee Retention Credit is explained in details in this separate article.  

For periods in 2021, the following changes apply to the ERC:

• A business can now apply for both PPP and the ERC. (ERTC and PPP funds cannot be applied to the same wages. Employers must be careful to itemize and account for where each type of funds is being applied).
• Non-profit organizations are eligible to use this ERTC program if operations have been partially to fully suspended.
• The credit percentage is increased from 50% to 70% of qualified wages.
• Qualified wages are increased from $10,000 in total per employee to $10,000 per quarter per employee.
• Qualified wage restrictions apply at 500 employees instead of 100.
• Drop in gross receipts requirement decreases from 50% to 20% over a prior quarter.

Additional Federal Stimulus Package Highlights

• Pre-Existing SBA Loan Relief – Businesses with SBA loans taken prior to the covid-19 pandemic will continue to see the federal government cover principal and interest payments for up to 18 months. This is an extension from the original six month of relief.
• Pandemic Unemployment Insurance –Displaced workforce will be eligible for an additional $300 per week in pandemic unemployment insurance, which is down from the original $600 offered in the CARES Act. All persons on unemployment insurance will be automatically enrolled into the the benefit program. The program expires March 14, 2021.
• Grants for Live Venue Operators – A new grant program for live venue operators will be available to live venue operators and promoters, theaters, independent movie theaters, live performing arts organization operators, museum operators and talent agents (with a 25%+ reduction of revenue). Grants will be either $10 million or 45% of gross earned revenue in 2019. Grant funds will be limited for use. Unfortunately, this grant does not apply to applicants who have received PPP Loan Funds. Grant application portal is pending through the SBA. Check the SBA site for updates.

Other Credits and Deductions

1. 1Business meals from a restaurant will be 100% deductible for 2021 and 2022, rather than 50%.
2. 2Above-the-line charitable donations for non-itemizers will be available in 2021 as well and increased to $600 for those married filing jointly in 2021.
3. 3The increased individual AGI threshold from 60% to 100% and increased corporate limitation from 10% to 25% of taxable income for qualifying cash contributions is extended through 2021.
4. 4A special temporary rule allows taxpayers taking the Earned Income Tax Credit or the Child Tax Credit the ability to use income from their 2019 tax year to determine a 2020 credit.
5. 5Favorable depreciation rules for taxpayers electing out of tax code Section 163(j) business interest expense limitation rules.
6. 6Educators’ deductible costs now include personal protective equipment and other coronavirus prevention related supplies.
7. 7Farmers may elect to retain the two-year carryback of a net operating loss (NOL), rather than claim a five-year carryback as provided for in the CARES Act. Farmers may also revoke the election to waive the carryback of an NOL.
8. 8The employee portion of certain payroll taxes deferred under President Trump’s memorandum on wages paid from Sept. 1, 2020 through Dec. 31, 2020 have an extended repayment period now through Dec. 31, 2021, rather than April 30, 2021.
9. 9Taxpayers can roll unused health and dependent care flexible spending amounts from 2020 to 2021, and from 2021 to 2022.

Conclusion

This Federal Stimulus Package bill provides significant relief to businesses and individuals alike. There are many areas of complexity, but overall, is provides real value to those impacted by Covid-19. 

Please reach out if you would like help with any applications. It is important you read and understand these articles and guides before reaching out.

Compliance Requirements for a Remote Workforce

Due to the increased work from home, compliance requirements for a remote workforce is the hottest topic in HR today.

According to Gallup, the number of days employees are working remotely has doubled during the pandemic. Some companies are even considering making a remote work arrangement permanent. While there are no laws that exclusively apply to remote workplaces, remote work does come with additional compliance risks.

While these compliance requirements for a remote workforce can be customized to specific organizations, below is our general guidance for employers. 

Logging Hours and Preparing Paychecks

Make sure that employees are logging all of their time. Keep in mind that when working from home, the boundaries between work and home life are easy to blur. Employees may be racking up “off the clock” work, and even overtime, that they aren’t being paid for. While this may seem harmless enough in the moment, particularly if the employee isn’t complaining, unpaid wages can come back to bite you once the employee is on their way out the door.

Minimum Wage

Employees should be paid at least the minimum wage of the state where they physically work, whether this is a satellite office or their own home. Beyond that, it’s important to be aware that some cities and counties have even higher minimum wages than the state they are located in. In general, with most employment laws, you should follow the law that is most beneficial to the employee.

Breaks

Remote employees must take all required break and rest periods required by law, as if they were in the workplace. Just because your employees are working from home doesn’t mean they are exempt from breaks. You cannot assume that they are always running to the fridge, making breaks one of the major compliance requirements for a remote workforce.

Harassment Prevention Considerations

You may have employees working in a state that has a lower bar for what’s considered harassment or that requires harassment prevention training. You can find this information on the State Law pages on the HR Support Center.Remote work also comes with additional opportunities for harassment (even if it doesn’t rise to the level of illegal harassment) such as employees wearing clothing that crosses the line into inappropriate, roommates in the background unaware that they are on camera, or visible objects that other employees may consider offensive.

You can prevent these sorts of incidents by having clear, documented expectations about remote meetings, communicating those expectations to your employees, and holding everyone accountable to them. It also wouldn’t hurt to occasionally remind everyone to be mindful that they and what’s behind them are visible to coworkers when they’re on video.

That said, going overboard with standards that you’re applying to employees’ private homes can cause anxiety and morale issues, so make sure your restrictions have some logical business-related explanation.

Workplace Posters as one of the compliance requirements for a remote workforce

Many of the laws related to workplace posters were written decades before the internet, and so their requirements don’t always make sense given today’s technology.The safest option to ensure you are complying with all posting requirements in one fell swoop is to mail hard copies of any applicable workplace posters to remote employees and let them do what they like with the posters at their home office. If you have employees in multiple states, you should send each employee the required federal posters, plus any applicable to the state in which they work.Alternatively, more risk-tolerant employers often provide these required notices and posters on a company website or intranet that employees can access. A number of newer posting laws expressly allow for electronic posting, but this option is not necessarily compliant with every posting law out there.

FMLA Eligibility

Remote employees who otherwise qualify will be eligible for leave under the federal Family and Medical Leave Act (FMLA) if they report to or receive work assignments from a location that has 50 or more employees within a 75-mile radius.According to the FMLA regulations, the worksite for remote employees is “the site to which they are assigned as their home base, from which their work is assigned, or to which they report.” So, for example, if a remote employee working in Frisco, TX, reports to their company’s headquarters in Portland, OR, and that site in Portland has 65 employees working within a 75-mile radius, then the employee in Frisco may be eligible for FMLA.

However, if the site in Portland has only 42 employees, then the remote employee would not be eligible for FMLA. The distance of the remote employee from the company’s headquarters is immaterial.

You may be interested in the recent FFCRA Sick Leave Rules Changes

Verifying I-9s as compliance issue for your remote workforce

In normal circumstances, the physical presence requirement of the Employment Eligibility Verification, Form I-9, requires that employers, or an authorized representative, physically examine, in the employee’s physical presence, the unexpired document(s) the employee presents from the Lists of Acceptable Documents to complete the Documents fields in Form I-9’s Section 2.However, in March, the Department of Homeland Security (DHS) temporarily suspended the physical presence requirement for employers and workplaces that are operating remotely due to COVID-19 related precautions. In other words, employers with employees taking physical proximity precautions due to COVID-19 (and operating remotely) are not required to review the employee’s identity and employment authorization documents in the employee’s physical presence. Inspection should instead be done remotely. As of the date of this blog post, this temporary rule is still in effect.

Equipment

In some states, an employer is required either to provide employees with the tools and items necessary to complete the job or to reimburse employees for these expenses. However, workstation equipment like desks and chairs is usually not included in this category of necessary items.That said, an employee might request a device or some form of furniture as a reasonable accommodation under the Americans with Disabilities Act (ADA) so they can perform the essential functions of their job. In such cases, you would consider it like any other ADA request. Allowing them to take home their ergonomic office chair, for example, would probably not be an undue hardship and therefore something you should do.

Deciding Who Can Work from Home

You may offer different benefits or terms of employment to different groups of employees as long as the distinction is based on non-discriminatory criteria. For instance, a telecommuting option or requirement can be based on the type of work performed, employee classification (exempt v. non-exempt), or location of the office or the employee. In order to be in compliance with requirements for a remote workforce, you should be able to support the business justification for allowing or requiring certain groups to telecommute.

Simplified PPP Forgiveness Form 3508S

Recipients of PPP loans can now apply for forgiveness using the simplified PPP forgiveness Form 3508S if they borrowed $50,000 or less. This form was just released by the treasury and the SBA on October 8, 2020. It provides new guidance on the forgiveness and loan review processes for all PPP loans of $50,000 or less.

Under the Interim Financial Rule (IFR), PPP borrowers of the said amount or less are exempted from loan reductions in forgiveness based on:

• Reductions in employee salaries or wages
• Reductions in full-time-equivalent employees

The new SBA Form 3508S enables small to midsized businesses to apply for forgiveness for their PPP loans. If such borrowers, plus their affiliates, received the loans amounting to about $2 million or more they are disqualified from using form 3508S. These guidelines are clearly stated on the instructions for the SBA Form 3508S. These guidelines were released with the new directive.

Current stats show that of the 5.2 million loans approved by the SBA, over 3.57 million were in the range of $50,000 or less. In total, these loans amounted to about $62 billion of the total $525 billion in PPP loans. Of this, about 1.71 million PPP loans of $50,000 and below were made out to businesses that have zero or close to no employees.

Certainly, borrowers of PPP loans of $50,000 and below must still make some certifications. They must also provide lenders with some documentation for payroll and non-payroll costs.

Defining the Paycheck Protection Program (PPP)

The Paycheck Protection Program is a loan program that was established to help small to medium businesses stay afloat and keep paying their workers during the pandemic. Also, businesses covered included sole proprietors, self-employed workers, tribal businesses, and certain non-profit organizations. The Paycheck Protection Program allowed businesses to apply for low-interest loans use for their payrolls. Such PPP loans could also be used to cover rent, utilities, and other interests touching on businesses.

Lenders are obliged to partially or fully forgive these loans if borrowers keep their employee counts and maintain their employee wages. The program was established in 2020 and used to help small and midsized businesses stay afloat amidst the Covid-19 crisis.

Requirements to qualify for PPP loan forgiveness form 3508S

To qualify to use the Simplified PPP forgiveness Form 3508S application, you must fill out the following loan details:

• The PPP loan amount
• SBA and lender loan numbers
• PPP loan disbursement date
• Economic Injury Disaster Loan advance amount and application
• Employees at the time of loan application and during the time of forgiveness application
• Forgiveness amount

Borrowers must then certify that they meet all the Simplified PPP loan forgiveness requirements to qualify for loan forgiveness.

Lender responsibilities regarding PPP loan forgiveness

The Interim Final Rule (IFR) set guidance on lender responsibility for PPP loans of all sizes. This was done to review the borrower’s documentation of eligible costs for forgiveness in excess of their PPP loan amount.

When a borrower submits Form 3508S, the lender would be required to:

• Confirm the receipt of the certifications in the form
• Confirm the receipt of the documentation the borrower must submit to aid to verify payroll and non-payroll costs

The borrower would be responsible for providing accurate calculations of the loan forgiveness amounts. She must also attest to the accuracy of the reported calculation and any information on their loan forgiveness application. According to the IFR, lenders are allowed to rely on the borrower’s representations.

The IFR addresses all the lender’s responsibilities should the borrower submit documentation of eligible costs exceeding the borrower’s PPP loan amount. This amount cannot exceed the borrower’s initial amount of the PPP loan.

How to apply for PPP loan forgiveness using the Simplified PPP forgiveness form 3508S

Whether the borrower submits SBA Forms 3508, 3508S, or 3508EZ, or a lender’s equivalent form, it’s the lender’s responsibility to acknowledge receipt of the documentation.

This action by the IFR streamlines the loan forgiveness process of the Simplified Paycheck Protection Program. And this has been made possible on PPP under $50,000 toward the benefit of thousands of PPP lenders who strived to have their loans processed quickly.

Steven Mnuchin, the Treasury Secretary, also expressed his team’s commitment towards making the PPP loan forgiveness process as very simple. He insisted on it being straightforward while protecting against misuse of funds and fraud. According to Steven, the Treasury would continue to favor any additional legislation and directives to simplify the forgiveness process further.

Current PPP Situation in Brief

The SBA only just released another simplified application known as the SBA Form 3508S on October 5th, 2020, along with detailed instructions for its use. As with Form 3508, this form is only applicable if the lender’s PPP loan amount received by the borrower was $50,000 or less.

On the other hand, any borrower who received PPP loan amounts totaling $2 million or more cannot use the Form 3508S. These borrowers must use Form 3508 or Form 3508EZ or the lender’s equivalent form.

Any borrower who qualifies for and uses the 3508S is also exempted from any form of reductions in the borrower’s loan forgiveness amounts. This is based on reductions in FTE employees or employee salaries from the CARES Act.

The SBA Form 3508S doesn’t require borrowers to provide the calculations they used to find their loan forgiveness amounts. Nevertheless, the SBA may request that you provide documentation and other information to review those calculations. The borrower is also expected to retain all documentation that:

• Was submitted with the loan application
• Proves the borrower’s certification of eligibility for the loan and material compliance with PPP’s requirements
• Backs up the loan forgiveness application.

 Such documents are to be retained for six years from the date of repaying or forgiving the loan.

As a borrower, you can submit the application for forgiveness electronically. Be sure to submit it within ten months after the expiry of the loan-covered period to the lender servicing your loan.

EZ Application for Forgiveness to Avoid Data-Intensive Calculations

The latest streamlined loan forgiveness application, Form 3508EZ, and its related instructions are the current most significant simplification forms of the PPP loan.

This new simplified PPP loan forgiveness form 3508S should eliminate the need to collect several counts of FTE employees provided either of these statements are applicable:

• The borrower doesn’t produce the number of employees or average pay hours of employees between January 1st, 2020, and February 15th, 2020, the end of the Covered Period. If the borrower could not hire similarly qualified employees for any unfulfilled positions by December 31st, 2020, and corresponding reductions in each employee’s hours that the borrower offered to restore but was refused.
• The borrower could not operate optimally between February 15th, 2020, and the end of the Covered Period. This may be due to compliance with the Secretary of Health and Human Services’ guidance and requirements between March 1st, 2020, and December 31st, 2020. This also included directives by the Occupational Safety and Health Administration and the Director of the Centers for Disease Control and Prevention. These guidelines were issued to maintain standards of social distancing, sanitation, and any other customer safety requirements related to the Coronavirus.

Borrowers using the SBA Form 3508EZ will still be required to submit the number of their employees up to the time of the loan application and forgiveness application dates. However, this should be a much easier tally compare to undertaking the FTE counts.

About the Small Business Administration

The U.S. Small Business Administration helps make the American dream of business ownership and maintenance a reality again. As the current only go-to resource and voice for small and midsized businesses, the SBA helps empower small entrepreneurs with the support and resources they need to recover, grow, and expand from the current disaster.

The Simplified Paycheck Protection program delivers services through SBA field offices and partnerships using both public and private organizations.

New Back-to-School FFCRA Guidance from the Department of Labor (DOL)

The new back-to-school FFCRA guidance from the department of labor (DOL) is out. Ever since it became clear that not all schools would be fully reopening for the new school year, employers and employees have been unclear on what to do. They have been wondering how the federal Families First Coronavirus Response Act (FFCRA) would apply in the variety of new schooling scenarios. 

A few weeks ago we wrote this blog post detailing the FFCRA sick leave rules changes. If you are not up-to-date. Please read it first.

Last week, the Department of Labor released several new Questions and Answers that address those issues, quoted below:

Question 98: My child’s school is operating on an alternate day (or other hybrid-attendance) basis. The school is open each day, but students alternate between days attending school in person and days participating in remote learning. They are permitted to attend school only on their allotted in-person attendance days. May I take paid leave under the FFCRA in these circumstances?

Yes, you are eligible to take paid leave under the FFCRA on days when your child is not permitted to attend school in person and must instead engage in remote learning, as long as you need the leave to actually care for your child during that time and only if no other suitable person is available to do so.

For purposes of the FFCRA and its implementing regulations, the school is effectively “closed” to your child on days that he or she cannot attend in person. You may take paid leave under the FFCRA on each of your child’s remote-learning days.

Question 99: My child’s school is giving me a choice between having my child attend in person or participate in a remote learning program for the fall. I signed up for the remote learning alternative because, for example, I worry that my child might contract COVID-19 and bring it home to the family. Since my child will be at home, may I take paid leave under the FFCRA in these circumstances?

No, you are not eligible to take paid leave under the FFCRA because your child’s school is not “closed” due to COVID-19 related reasons. It is open for your child to attend. FFCRA leave is not available to take care of a child whose school is open for in-person attendance.

If your child is home not because his or her school is closed, but because you have chosen for the child to remain home, you are not entitled to FFCRA paid leave. However, if, because of COVID-19, your child is under a quarantine order or has been advised by a health care provider to self-isolate or self-quarantine, you may be eligible to take paid leave to care for him or her. See FAQ 63. Also, as explained more fully in FAQ 98 of the new back-to-school FFCRA guidance, if your child’s school is operating on an alternate day (or other hybrid-attendance) basis, you may be eligible to take paid leave under the FFCRA on each of your child’s remote-learning days. This is because the school is effectively “closed” to your child on those days. 

Question 100: My child’s school is beginning the school year under a remote learning program out of concern for COVID-19, but has announced it will continue to evaluate local circumstances and make a decision about reopening for in-person attendance later in the school year. May I take paid leave under the FFCRA in these circumstances?

Yes, you are eligible to take paid leave under the FFCRA while your child’s school remains closed. If your child’s school reopens, the availability of paid leave under the FFCRA will depend on the particulars of the school’s operations.

Providing Non-FFCRA Leave and Flexibility

Although employees aren’t entitled to FFCRA leave if their child’s school is technically open and they choose remote learning, we encourage employers to work with employees who have chosen to keep kids home (as in Question 99), working out a flexible or reduced schedule as needed.

If an employee has chosen to have their children attend school online only, it is likely because they feel the school is not safe or the risk of the child bringing the virus home and infecting a more vulnerable person is too high.

If required to choose between working and keeping their family safe, many parents will choose safety. This, unfortunately, leaves their employer with a position to fill. The cost of replacing an employee is generally from 20 to 200 percent of their annual salary. Therefore, we suggest to employers to work out a flexible or reduced schedule with employees. This is likely the best choice for the company’s bottom line as well as its reputation.

Besides the new back-to-school FFCRA guidance, the full 100-question Department of Labor FAQ is available here. 

Temporary Employee Tax Deferral

The temporary employee tax deferral program is as a result of a Presidential memorandum. On August 8th, President Trump directed the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ portions of Social Security taxes from September 1 through December 31, 2020.

The goal is to put more money in the pockets of workers during the COVID-19 pandemic emergency. 

Social Security Tax Withholding Deferred

The temporary employee tax deferral applies to the 6.2% tax on wages or compensation paid for a bi-weekly pay period of less than $4,000 or the equivalent threshold amount for other pay periods. In other words, employees with annual wages up to $104,000 are generally eligible for the deferral.

IRS Guidance on The Temporary Employee Tax Deferral

Just a few days before the start of the deferral period, the IRS has issued some vague guidance regarding the temporary employee tax deferral program. It explained that the due date for withholding and paying Social Security taxes has been postponed. These taxes are now due between January 1, 2021 and April 30, 2021.

This means that Social Security taxes not withheld in the last 4 months of 2020 are to be withheld from employees’ wages during the first 4 months of 2021. Furthermore, in those 4 months, the required taxes on the 2021 wages will be continue to be withheld as well. 

Obviously, the temporary deferred withholding will increase employees’ take-home pay in September through December of this year. On the contrary, their winter and early spring 2021 paychecks will be smaller because the Social Security tax withholding will be twice the usual amount.

Example

Assumption: This employee lives in a state without income tax.

An employee is paid weekly and his wages in 2020 are $1,000 per week. Normally, $62.00 in Social Security (6.2%), $14.50 in Medicare (1.45%) and $120 in federal income taxes are withheld from his wages by the employer. The employer adds $76.50 (the employer’s matching amount for Social Security and Medicare tax) before paying the withheld amount to the government. Therefore, the employee’s take-home pay is $803.50. 

Under the temporary employee tax deferral arrangement, nothing would be withheld for the Social Security tax. So the employee’s take-home pay for the week would go up by $62.00 for a total of $865.50. The amount transmitted to the government would be $62.00 less per week. 

Fast forward to 2021: The employee’s wages are still $1,000. And for as many pay periods in 2020 as the deferral occurred, the Social Security tax withholding in 2021 will be $124. This amount is made up of the amount deferred in 2020 and the regular 2021 withholding. For these pay periods, the take-home pay will be $741.50.

Employer’s Responsibility

The IRS Notice places the responsibility on the employer to make payment of the deferred payroll taxes by May 1 of 2021. Otherwise, the employer may owe penalties, interest and additional tax.

This may create a problem if an employee no longer works for the same employer in 2021. Obviously, the employer can’t withhold the makeup tax, since the worker has no wages from that employer.

According to the IRS notice, if necessary, the employer may make other arrangements to collect the total deferred taxes from the employee. Unfortunately, it doesn’t specify what those arrangements should or could be.

Unresolved Issues

Whether an employer must stop withholding the Social Security tax from September 1 through the end of the year is NOT addressed in the guidance. Nevertheless, Treasury Secretary Mnuchin is reported to have said that he can’t force employers to stop withholding.

Also not covered is if an employee may decline to have the tax deferred. Some large employer organizations have said is logistically unworkable.

The president has indicated that he would like the deferred taxes permanently forgiven. As it is with all tax matters, it would take congressional approval to change the law. Unfortunately, given the highly charged political climate in Washington, that may not happen.

AccuPay’s Opinion

We strongly advice you to stay away from the temporary employee tax deferral of their social security withholding. It is obvious in so many fronts that this memorandum is more problematic than good. Here is why:

1. 1The amount deferred is still due. There is no guarantee for forgiveness (unless president Trump wins a second term, but congress still has to legislate it)
2. 2If an employee leaves, whether voluntarily or not, employers will not be able to collect the deferred taxes
3. 3Employers are stuck with the nightmare of collecting the deferred taxes, even if all employees stay (what are the chances for the majority?)
4. 4Tax filing will be a challenge, though doable. 

Overall, this temporary employee tax deferral memorandum is a compliance nightmare and should be avoided at all costs. Send us an email or call us on Thursday or Friday if you would like to discuss further.

FFCRA Sick Leave Rules Changes

The Families First Coronavirus Response Act (FFCRA) put in place sick leave rules to help employees take sick leave without losing their jobs. These Coronavirus sick leave rules have not been without issues. As a result, some aspects of the Coronavirus sick leave rules (FFCRA) sick leaves have been changed, making them more favorable to employees as discussed below.

A federal court in New York recently struck down four federal Department of Labor (DOL) rules related to the leaves provided by the Families First Coronavirus Response Act (FFCRA). As a result, certain aspects of the FFCRA are now more favorable to employees.

Unfortunately, it’s not clear if the ruling applies nationwide or only in the Southern District of New York, where that court is located. Until there is further activity in the case—which may clarify whether the rules remain intact throughout the rest of the country—we recommend that employers err on the side of caution when administering FFCRA leaves and assume these particular rules no longer apply.

What is clear is that these four rules definitely do not apply to the counties of Bronx, Dutchess, New York, Orange, Putnam, Rockland, Sullivan, and Westchester (i.e., the Southern District of New York).

Here are the rules that the court invalidated:

The requirement that work be available for an employee to use leave

DOL Rule: The DOL said that for an employee to use Emergency Paid Sick Leave (EPSL) or Emergency Family Medical Leave (EFMLA, aka EFMLEA), the employer had to have work available for them during the time they needed leave. For instance, if an employee was furloughed while sick with COVID-19, they would not be eligible for EPSL.

The Court’s Ruling: Availability of work is irrelevant. If an employee is still employed, whether on the schedule or not, they should be allowed to use FFCRA leave for qualifying reasons.

The requirement that employers agree to intermittent leave

DOL Rule: Employees must get approval from their employer to use intermittent leave to care for their children when their school or place of care is unavailable because of COVID-19.

The Court’s Ruling: If an employee needs intermittent leave (partial weeks or partial days off) to care for their child whose school or place of care is unavailable because of COVID-19, the employer must allow it.

The requirement that employees provide documentation before taking leave

DOL Rule: Employers could require that employees provide certain documentation before being allowed to take FFCRA leave or before designating the leave as EPSL or EFMLA.

The Court’s Ruling: Employers can still require documentation (which is necessary to get their tax credit), but they can’t prevent an employee from starting leave until the documentation is received. The law clearly states that an employee must provide notice “as is practicable” when taking EFMLA and after the first workday of leave when taking EPSL.

The definition of health care provider, for the purpose of exemption from leave

DOL Rule: The DOL defined health care providers very broadly, to include anyone who works for a healthcare entity and many who contract with one. (The rule was so broad that a custodian working at a drugstore or an English professor at a university with a medical school could be exempt.)

The Court’s Ruling: The definition is too broad. However, the court did not provide a new definition. We recommend that employers apply the exemption only to those employees capable of directly providing healthcare services.

We will be watching closely for activity in this case and will let employers know if and when things change or become clearer.