Last edited 12:32 p.m., Oct. 1, 2020
While federal stimulus funds have brought economic relief amid the COVID-19 pandemic, uncertainty has been persistent among some business owners.
Programs bankrolled through the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act are eliciting questions from business owners and accountants alike, and a payroll tax deferral option is being met by state leaders and others with skepticism.
Gov. Mike Parson announced earlier this month Missouri would decline a deferral withholding state employees’ federal payroll tax through the end of the year.
Other entities that declined to participate include the U.S. House of Representatives, UPS, the U.S. Postal Service, Wells Fargo and, more locally, Sun Solar.
CEO Caleb Arthur said as with all of his money questions, he ran the deferral past his accountant and learned the reprieve was only temporary.
“Temporary is a nice thing, but they’re going to owe it back and that’s less money in their paycheck the next year,” Arthur said.
Based on that understanding, he drafted a message to employees letting them know Sun Solar would not participate “because it’s going to put you guys in a hard spot,” Arthur said. “Not one employee was upset. I got five employees that privately reached out in emails and thanked me.”
“Sometimes as a CEO in this pandemic, it’s very difficult to make decisions that end in a win-win,” he said.
The deferral was made available through President Donald Trump’s Aug. 8 executive order intended to provide relief for workers.
The order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, applies to the portion of Social Security payroll taxes withheld from employees’ paychecks. It amounts to 6.25% of a worker’s earnings. Any employee with biweekly earnings of $4,000 or less is eligible to take part. The deferral is available through the end of the year.
The website for the U.S. House of Representatives’ Committee on Ways and Means indicates employers are not under a mandate to take advantage of the deferral and won’t be penalized if they don’t, and employees do not have the right to demand participation.
The entire portion of taxes deferred would have to be repaid through withholdings made between Jan. 1 and April 30, 2021, effectively doubling the employees’ tax responsibility to 12.5% for that period. If for some reason an employer can’t recoup the taxes from an employee — the employee quits, for example — Ways and Means indicates “the employer may make arrangements to otherwise collect.” If the taxes aren’t paid by May 1, 2021, “interest, penalties and additions to tax will begin to accrue.”
When asked for comment about Missouri’s decision to not participate in the tax holiday, Parson spokesperson Katy Alexander provided an email reiterating a statement made by Chris Moreland of the Office of Administration: “We do not believe our state employees would be advantaged by doubling their tax obligations between January and April of 2021, in exchange for temporarily reduced taxes for three months this year. We reached out to a variety of business organizations, employers and other states to see if they were participating and most have elected not to participate. For these reasons we will not be participating in the payroll tax deferral.”
Two certified public accountants at KPM CPAs PC say they’re taking the same approach as the state and Arthur unless clients ask them not to. So far, none have.
“There’s just a lot of confusion surrounding it,” said Josh Brock, a manager at KPM. “What happens if your employee leaves or gets terminated before the year’s up? Are you going to be hit paying that actual tax?”
PPP and taxes
Andy Clemens, KPM shareholder, said the payroll tax holiday isn’t the only program loaded with questions. Specifically, he brings up the Paycheck Protection Program.
“Right now there will be a tax burden associated with this unless Congress acts to basically make the PPP funds that are spent expenses, make them deductible,” Clemens said. “They currently are not deductible. There is definitely some tax planning that will need to be done for those borrowers.”
CPA Jared Duckett, co-owner of Duckett Ladd LLP, said when the PPP was announced, his clients scrambled to get the money to keep their businesses’ doors open with the understanding it was a forgivable loan.
But now that they have the money, they’re wondering how it’s forgiven and how it all works.
“I think really what was confusing to most clients is it came out and most people understood that it wasn’t taxable, it was a forgivable loan. But there is a section in the code, any expenses related to tax-exempt money is not tax deductible,” Duckett said.
Arthur at Sun Solar was among those who sought PPP money.
“When the pandemic hit, we initially laid off 15 of our 105 employees,” he said, noting a month later, he was approved for the forgivable loan. “We immediately rehired everyone we could. We thought this could be a good program that would put more money in their pockets.”
Arthur did not disclose the amount of his PPP loan, but according to data from the U.S. Small Business Administration and the Department of the Treasury, Sun Solar received between $350,000-$1 million.
He said he’s confident his PPP loan will be forgiven, but he still has questions. “Obviously, even if it’s forgiven, does it count as income and how does that affect the value of my company?” he said.
To get ahead of any potential issues, Duckett, Clemens and Brock all offered the same advice: Get with your adviser now for tax planning.
“Talk to your accountant, especially if you have not been impacted like you thought you might. Definitely start planning now,” Clemens said.
“A lot of the planning has got to be preliminary because there’s a lot of questions that Congress needs to answer,” he said, adding the experience feels like “we’re flying the plane as we’re building it.”
One of the remaining questions is whether Congress will vote to make the Small Business Administration’s PPP easy loan forgiveness application — as opposed to the long form — more widely available.
It presently applies to businesses that fall into categories that are broadly defined as a self-employed person with no employees or businesses that didn’t reduce the wages of employees who earn less than $100,000 annually.
“Congress is considering a $150,000 threshold,” Clemens said. “But again, it remains to be seen. It’s that flying-by-the-seat-of-my-pants concept.”
Arthur said he’s ready for Congress to make some decisions and clarify some of the issues regarding pandemic relief.
“I still feel overwhelmed and feel like I’m missing stuff,” he said.
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