7 Measures you should not use to cut payroll costs

Business Topics

7 Measures You Shouldn’t Use to Cut Payroll Costs

7 Measures you should not use to cut payroll costs

Your employees depend on you just as much as you depend on them. They're part of your team, and you never want to let them down. In fact, they're a big part of the reason why your business is thriving. So, it can be really frustrating and incredibly heart-breaking when you have to make massive budget cuts that impact them. But even if you have to, there are measures you should not use to cut payroll costs.

When money gets tight, you may feel like there's no option than to cut operating costs wherever you can, which includes making significant changes to your payroll. However, there are some methods you should only be implementing as a last resort (if at all).

Here are 7 Measures you should not use to cut payroll costs:

1: Wage and labor cuts

Remember how I said your employees depend on you?

Well, I meant it.

There's a reason why this option is number one on the list of 7 measures you should not use to cut payroll costs. It should be your last--and final--option.

Here's why:

Employees carry your business, especially when it comes to customer service. In most cases, the people that work for you are the face of your company.

Most likely (unless you know all your customers by name) they're the first people that come to mind when your customers think of your business.

Naturally, cutting wages or even issuing layoffs will decrease employee morale. If this happens, their performance is likely to take a hit too.

The reason for this is simple. By cutting wages you cut a chunk of your employees' livelihood.

This puts a lot more strain on them to work harder to make ends meet, such as by picking up a second job.

So instead of getting the 100% effort you used to get, your employees will be forced to give you only 50% of their best effort.

Additionally, if you make labor cuts, you put more pressure on the remaining employees take on the task of those who were laid off.

Layoffs also place added stress on employees because they'll be in fear of getting the ax as well.

We all like to think that this might encourage them to work harder, but the fact of the matter is that it can have the opposite effect.

Our employees are actually more likely to fail at their jobs because they'll be focusing less on the tasks at hand and more on their fears.

Place stressed and distracted employees in the same room as customers and it is a disaster waiting to happen.

2: Pay Cuts To Cut Payroll Expenses

So if you shouldn't cut employee jobs or wages, the next logical step seems to be to cut your own salary right?

No, not exactly.

This "take one for the team" attitude is noble, but it can also be problematic.

Just like your employees work hard to make ends meet, you also have expenses you have to keep up on.

If you cut your own salary, you're bound to hurt your own morale.

Of course, no one is going to be more dedicated to your business than you and odds are you'd probably do your job for free if you had to.

But the added stress of a tight personal budget plus the pressures of running a business will eventually add up.

And that stress will show.

The more you feel the heat of having to play Russian Roulette with your bills, the more that strain will start to show in every area of your life--including your work.

You'll become a worse leader for it, despite your noble intentions.

3: Chopping Hours To Cut Payroll Expenses

So if you can't cut labor and you can't take a pay cut, what should you do? Cut hours?

This too proves to be a bad idea.

Once again, if you turn full-time employees into part time laborers, they're going to have to get creative about making ends meet.

This means they'll have to cut corners in order to take on multiple jobs.

Even worse, they might just start looking for a new job all together.

Additionally, cutting hours for part-time employees can ultimately hurt your bottom-line more than it can help.

Remember, unhappy employees equal unhappy customers and lower overall performance.

4: Mandatory Leaves of Absence

Lots of employers take on this method, thinking that it's a clever way to cut expenses.

And in some cases it can be.

On one hand, your employees get to keep their jobs and their benefits.

This makes it a great option in times of economic crisis when you're strapped for cash.

You can ask your employees to take regular time off (such as twice a month) or it can be set for an indefinite interval.

On the other hand, it's an unpaid leave (also known as a furlough), which can be detrimental to your employees.

It can also be legally tricky to enact a furlough, since it would require you set strict rules with your employees.

Here's why:

Employees taking mandatory leave cannot do any work--including answering emails--during that time. If they do, you are legally required to compensate them.

Finally, the biggest reason why furloughs land themselves on list of things you shouldn't use to cut payroll costs is because they actually don't save that much money.

Sure, you might not have to pay salaries for all, or a portion of, your team, but there is still the cost of benefits.

Additionally, if you furlough your entire staff, or the majority, there is also the potential of you losing clients to other businesses while your company is on hiatus.

5: Converting to Commissions

If you work in sales, it might be tempting to switch some teams over to commission.

I mean theoretically it should be a win-win, right?

You save money and your employees get the opportunity of making more money.

Here's the problem: You don't want to find yourself having to hunt down a new workforce.

I know, commission seems attractive, but there's probably a good reason your employees are working for a salary instead.

Not everyone has the sales skills needed to make commission pay off.

I mean, think about it this way.

Really good real estate agents know how to close a deal, and they can make a lot of money doing it.

But while you might hear about some famous realtors, they're few and far between.

The rest have to struggle to make their commission, and in a many cases, it doesn't work out.

That fact alone will have your employees running for the hills in no time.

Additionally, clients might not be crazy about employees taking a more aggressive approach to sales. For customers that can be off putting and it can drive them away.

But, should this be a very attractive and the right thing to do for your business, you should check out this guide and implement it correctly.

6: Automations to Cut Payroll Expenses

Depending on your industry, automation may or may not be a practical application as of now.

However, as technology continues to progress automation is becoming a more eminent reality for many businesses.

And most businesses are adopting it as a way to cut operating expenses. And it makes sense, doesn't it?

Why pay a human being to do the job if you can just replace that person with software or a machine that costs pennies?

Here's the problem with this:

Sure, machines might be faster, more accurate, and less expensive, but they are also impersonal and sometimes difficult to deal with.

Think about it.

If you've ever gotten stuck repeating a particular word over and over again to an automated system, you've probably found yourself gritting your teeth in frustration and prepared to give someone an earful.

A machine is no match for human compassion and comprehension.

If you replace the majority of your workforce with programs, you'll risk losing the aspects about your company that made attractive in the first place.

7: eliminating Bonuses to Cut Payroll Expenses

Finally, one of the last things you shouldn't use to cut payroll is getting rid of bonuses.

Why?

Whether you know it or not, your employees look forward to bonuses.

Bonuses, especially during the holidays, can really boost their performance.

When you get rid of bonuses, it's a big hit to your employees.

On one end, they don't get that extra income.

Equally, cutting bonuses depicts you as a cold or uncaring boss, especially if you cut bonuses for everyone except executives.

Bonus: Converting to Independent Contractors

This is probably the worst move to cut payroll costs.

Why?

Independent contractors are not employees, and the employer should not have any control in their work, only the results.

Such control fall into 3 distinct categories:

1
Behavioral: Does your company have complete control over what your worker does and how your worker does his job?
2
Financial: Do you control when your worker is paid? Do you supply all the tools and supplies? Do you decide whether or not to reimburse expenses?
3
Relationship: Do written contracts exist that outline such things as insurance coverage, vacation pay, pension plans, etc.? Is this work vital to your business, and is this relationship going to continue?

The government is very strict on how workers are classified.

Why? Because the government, both state and Federal, is interested in collecting payroll taxes.

To learn more on this topic, read an in-depth comparison between employees and independent contractors.

So how can you cut payroll expenses?

I know it might seem that your options are completely limited when it comes to cutting costs.

But there's a better way.

Instead of taking any measures that can hurt your employees, you can actually cut your payroll processing cost.

It takes a little more work, of course, but it's definitely worth it for both your employees and your business.

One of the best ways to cut down costs is to outsource your payroll instead of processing in house.

When you opt for a payroll service provider, your dollar goes farther. Not only do you spend less time having to worry about processing in-house, but you're less likely to get hit with costly mistakes.

However, if you already have a provider, you still might be paying too much for services you don't need.

Go through your payroll plan, and make sure that you are not paying for extra services that you don't need.

For example, if none of your employees have a bank account, then you don't need to be paying for direct deposit.

Additionally, make sure that you weren't lured in by a relatively low base charge, only to find add on features are ridiculously costly.

Even more importantly, make sure your provider hasn't increased their rates. If they have, it might be time to find a new one.

The closer you look at the details, the more you'll find potential areas where you can save hundreds.

Conclusion

All in all, you want to save money, but you don't want to do it at the expense of your employees, or worse, your business.

Think about other ways that you can cut cost that won't have major determents.

Don't be hesitant to renegotiate the terms of your payroll service (you usually can) or even shop around for a new provider.

More importantly, keep in mind that Payroll processing is one area where you can cut expenses, but it's just a start.

There are other services you use that you can also try to rework.

Maybe you pay too much on your company's internet bill, or maybe the invoice system you're using is charging you too much.

In fact, your business is more likely to tank because the drop in quality service will drive customers away.

Exhaust all the resources you can to cut cost in any other way before you let your employees take the hit.

Business Topics

Home Tax Deductions: Save Your Money

If you recently purchased your first home, you may not be aware of all the home tax deductions. In fact, tax benefits are often a prime reason for buying a home, either for personal use or to generate rental income. If this is your first time figuring the tax benefits of a new home, be sure to gather the following documents before completing this article. The topics we discuss concerning home tax deductions are better understood within the context of the tax documents in question.

Gather the following basic information before you prepare your tax return:

Closing statements if you bought or sold your home during the previous tax year
Form 1098, Mortgage Interest Statement, if you have mortgage interest
Mortgage Amortization Schedule. This shows the interest and principal you paid on the loan.
Tax returns for any year you took the Homebuyer Credit.
Records of points you are amortizing over a period of years.
A detailed list of home office expenses, if you are claiming any.
The amount you paid for the home, plus any improvements if you sold your home or you use it for business.
Property tax statements or receipts, if not paid through your mortgage company.

Major Home Tax Deductions

To ensure you get the full amount of home tax deductions allowed by law, you need to be familiar with some of the most common home-related expenses. These expenses are monies you have paid to facilitate the purchase, make necessary renovations, or use the home to operate a business. The most common home tax deductions are explained below.

Mortgage Interest Expense

If the debt is secured by the home, in most cases you may deduct the amount of mortgage loan interest you paid during the tax year in question. This amount will be shown on Form 1098, Mortgage Interest Statement, you should receive from your bank or other lender. Some basic rules apply.

If you paid less than $600 in interest, or you paid interest to someone other than a bank or approved lending institution, you will not receive a Form 1098. However, you may still be able to deduct home mortgage interest.
If your home loan exceeds $1 million, you may not be able to deduct the full amount of your mortgage interest. (If married but filing separately from your spouse, the amount is $500,000).
Special rules apply if your home loan was generated before October 14, 1987.

Home Equity Loan Interest Expense

A home equity loan is a loan against the equity you have built up in your home. It is an additional loan that exceeds the balance on the loan used to build or purchase your home. You can also incur home equity debt by refinancing your original home loan for more than the balance owed. The amount of the loan that exceeds the original purchase loan is home equity debt.

In most cases, the IRS allows you to deduct the interest on home equity debt regardless of how the money is spent. However, there are limitations on the amount of debt that can be treated as home equity debt. It cannot be over $100,000 greater than your acquisition debt (the limit is $50,000 if you are married but filing separate tax returns). It also cannot be greater than the difference between the fair market value of your home and the balance on your original acquisition debt. For more information see IRS Publication 936 (2016) Home Mortgage Interest Deduction and click the link for Home Equity Debt.

Home Improvements & Maintenance

Improvements such as a new porch, roof, room, or other major remodeling project can increase the value, or basis, of your home. While they are no longer directly tax deductible, it is wise to record all expenses for these home upgrades. They become necessary later when figuring taxable gains if selling your home, or for figuring depreciation if renting your home. For more information see IRS Publication 530, Tax Information for Homeowners.

Unless you used your home for business purposes or as a rental during the tax year in question, you cannot deduct maintenance costs such as painting, lawn care, repairing leaks, or cleaning.

Real Estate Taxes

Real estate tax is an annual tax levied by most state and local governments based on the value of real property. You can deduct all real estate taxes with other itemized deductions. Most real estate taxes are paid through your mortgage lender. This amount will be shown on Form 1098, Mortgage Interest Statement. If you only own the property part of the tax year, you only owe real estate tax for that part of the year. Therefore, only that portion of the yearly real estate tax is deductible.

Home Office Expenses

If you used part of your home for your business, you can take a home tax deduction for your expenses. Direct expenses can be completely deducted, as well as a portion of expenses that benefit the entire house, such as electricity, gas, water, and the like.

There are two methods for calculating home office deductions. To use the regular method, calculate the number of square feet in the home used for your business, and the total number of square feet in the home. You will also need to record your home expenses such as mortgage interest, real estate taxes, home repairs, utilities, insurance, security, and depreciation. A percentage of these are deductible using a formula relating to the amount of square feet used as office space for your business.

To use the simple method, you can deduct $5 for each square foot of office space used in your home, with a maximum of 300 square feet, subject to certain limitations. For more information see IRS Publication 587, Business Use of Your Home.

Late Payment Charges

If your mortgage lender levies a late payment fee, this fee is deductible as additional mortgage interest. Fees charged by the lender for specific services are not tax deductible.

Common Questions Regarding Home Tax Deductions

Can I deduct back real estate taxes I paid when I bought my home?

No. Delinquent, or "back", taxes are taxes that were imposed on the seller for an earlier tax year that is still unpaid. If you agree to pay delinquent taxes when buying a home, you cannot deduct them. They are to be treated as part of the cost of the home. IRS Publication 530, Tax Information for Homeowners

Can I move back into my home for two years to avoid paying tax on any gain?

As a general rule, if you sell a house you lived in and owned for two of the last five years, you don't have to pay tax on the capital gain. Unfortunately, you cannot use the exclusion to avoid paying tax on gains that are due to time periods after 2008 when you or your spouse did not live in the house. You may qualify for an exception if you were away from the house because of military service, or due to unforeseen circumstances such as a job transfer or health problems. For more information see IRS Publication 523, Selling Your Home.

Will I get audited if I claim a home office deduction?

Certain deductions are considered to be "red flags" the IRS chooses to examine more carefully. Traditionally, home office deductions are often thought to be one of these. However, your chance of being audited in any given year are actually about 1%. And there is no conclusive research that any one factor triggers an IRS audit.

Where do I record the sale of my home on my tax return?

The IRS no longer employs a specific form to record the sale of a home. Record the sale on Form 8949, Sales and Other Dispositions of Capital Assets. If you did not receive a Form 1099-S for the sale of your main home, and you do not have a taxable gain, you won't see the sale anywhere on your return. The IRS does not require you to report it.

How do I determine the amount of gain due to the time I didn't live in the house?

If you sold a home at a gain, you must pay capital gains tax on the gain that is due to the time you did not live in the house. If you sold your house at a gain, you must pay capital gains tax on the gain that is due to the time you did not live in the house. You must record the number of "unqualified use" days when you did not live in the house. You do not have to count days you served on extended duty for the armed services, the intelligence community, the Foreign Service or any temporary absence due to unforeseen circumstances. For more information see IRS Publication 523, Selling Your Home.

Payroll Processing

Top Paycheck Protection Program FAQs

Top Paycheck Protection Program FAQs and Key PPP Updates

Small businesses are looking for answers to their top paycheck protection program FAQs (frequently asked questions). And now that this Second Paycheck Protection Program has already launched, The SBA is trying to provide guidance on the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act.

The PPP Loan Program began it's second round of funding on Monday January 11th via Community Financing Institutions. Applications are being accepted in phases.

This tiered roll-out is designed to serve those hardest hit first, as dictated by the legislation overseeing this new round of PPP.

Key dates for the paycheck protection program (PPP)

1
Today, Monday, 1/11/21 - 1st Time PPP Loan Applications are accepted for minority owned businesses exclusively, through Community Financial Institutions (CFI's).
2
This Wednesday, 1/13/21 - 2nd Time PPP Loan Applications are accepted for minority owned businesses exclusively through Community Financial Institutions (CFIs) CFIs are smaller banks, credit unions, CDFI's and basically any other lender with less than $1B in assets.
3
Sometime after Wednesday, 1/13/21, PPP 1st and 2nd time loan applications will be accepted by most banking institutions. Larger banks will most likely NOT be opening up their application process until later in the week. Consult with your business banker for your bank's timelines.
4
The PPP Loan Program expires effective March 31, 2021.

The SBA is telling us that loan number generation will NOT be automatic as before – meaning the process may take a bit longer to protect against fraud, please be patient.

Did you know you can take the PPP loan and also the Employee Retention Tax Credit? More details in the article, including how to avoid the double-dipping trap.

Right now, business owners have a lot of questions. In a combined effort with partners in the legislature, professional organizations, legal and accounting practices we are bringing small businesses much needed answers as they become available.

Here, we’ve collected the most common questions business owners want answered about PPP right now, and we’ve written up the answers.

Top Paycheck Protection Program FAQs

FAQ 1: How long will it take for PPP2 to be enacted and go live?

When the Economic Aid Act was passed on December 27th, 2020 the legislation gave SBA 10 days to provide guidance on the contents and execution of the bill. The SBA has released new guidance as recently as Wednesday, January 6th, 2021. We expect the program to go live within a week.

To apply for the second draw of the Paycheck Protection Program we are suggesting that all businesses check in with a participating lender approved by the SBA. Look up a lender by state here.

FAQ 2: How do I measure a 25% decrease in revenue or gross receipts?

Businesses may qualify for a second PPP loan by showing a 25% decrease in revenue. According to the latest Interim Final Rule (IFR) on second draw PPP loans, revenue is captured using gross receipts. The IFR generally defines gross receipts to include all revenue in whatever form received or accrued. It includes gross receipts from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions. Nevertheless, the revenue is reduced by returns and allowances.

A borrower can calculate revenue reduction with gross receipts by taking any one quarter of 2020 and comparing it to the corresponding quarter from 2019. In this case quarter references a calendar quarter rather than a business or fiscal quarter.

FAQ 3: Do I need to apply for forgiveness for the first PPP loan to take a second PPP loan?

No, if you took a PPP loan in the first round of funding, there is no requirement to apply for PPP forgiveness before applying for a second PPP loan. However, the legislation does state that you must have used all funds from the first PPP loan. If not used up, you must show the intend to use those funds before you may apply for a second loan. More SBA guidance on intent to use funds may be coming soon.

FAQ 4: If I am a hotel or restaurant do I automatically qualify for 3.5x payroll?

Yes. The Economic Aid Act has provided for all businesses with a NAICS code starting with 72 to qualify for a loan amount up to 3.5 times payroll. This is one of the most important top paycheck protection program FAQs for the hospitality industry.

First draw businesses with NAICS codes beginning in 72 will qualify if they have no more than a total of 500 employees. Second draw businesses with NAICS codes beginning in 72 are eligible if they employ 300 or less people per location. They must also meet the revenue reduction requirements. Restaurant and hotel locations with a shared parent company that operate as separate legal business entities can apply separately.

FAQ 5: If my company took the maximum 2.5x payroll in the first round, am I still eligible for a second PPP loan?

Yes, you may still be eligible for a second PPP loan. The new Economic Aid Act is focused on supporting hard-hit businesses. You may, therefore, qualify for a second PPP loan (known as a 2nd Draw loan). Eligibility for a second PPP loan is based on proving a decrease in business revenue that is greater than or equal to 25% of the business’s gross receipts.

If you have a question not covered in the above top paycheck protection program FAQs, please let us know. We will try to answer.

Biz2credit is helping small businesses apply for the second draw of PPP. If interested, please click the link below to apply.

Please note: AccuPay is not in any way related to Biz2Credit. We do not receive any benefit for referring their service.

Pre-Apply Now

Source: Biz2Credit

Payroll Processing

California Stimulus Package

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.

Apply for CRF

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.

Apply for CHR

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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
Must 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
Active businesses or nonprofits operating since at least June 1, 2019
3
Businesses must currently be operating or have a clear plan to re-open once the State of California permits re-opening of the business
4
Business 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
Business 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
Business must be able to provide acceptable form of government-issued photo ID
7
Applicants 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
Businesses without a physical location in California
2
Nonprofit businesses not registered as either a 501(c)(3), 501(c)(19), or 501(c)(6)
3
Government entities (other than Native American tribes) or elected official offices
4
Businesses 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
Passive businesses, investment companies and investors who file a Schedule E on their personal tax returns
6
Churches and other religious institutions (regardless of whether such entities qualify as a 501(c)(3), 501(c)(19), or 501(c)(6))
7
Financial businesses primarily engaged in the business of lending, such as banks, finance companies and factoring companies
8
Businesses engaged in any activity that is illegal under federal, state or local law
9
Businesses 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
Businesses 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
Businesses that restrict patronage for any reason other than capacity
12
Speculative businesses
13
Businesses 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
“Affiliated” companies (as such term is defined in 13 C.F.R. § 121.103)
15
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

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.

Apply for CARG

Payroll tax & Compliance

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 to GR 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 2019 3Q 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

News and updates

California Law and 2021 Minimum Wage Updates

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.

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

Belmont

15.90

Burlingame

15.00

Cupertino

15.65

Daly City

15.00

El Cerrito

15.61

Half Moon Bay

15.00

Hayward (26 or more employees)

15.00

Hayward (25 or fewer employees)

14.00

Los Altos

15.65

Menlo Park

15.25

Mountain View

16.30

Novato (100 or more employees)

15.24

Novato (26–99 employees)

15.00

Novato (1–25 employees)

14.00

Oakland

14.36

Palo Alto

15.65

Petaluma

15.20

Redwood City

15.62

Richmond

15.21

San Carlos

15.24

San Diego

14.00

San José

15.45

San Mateo

15.45

Santa Clara

15.62

Santa Rosa

15.20

Sonoma (26 or more employees)

15.00

Sonoma (25 or fewer employees)

14.00

South San Francisco

15.24

Sunnyvale

15.24

COVID Relief Bill - Tax Credits for Paid Leave Extended to March 31 2020

News and updates

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.

Payroll tax & Compliance

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

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
Business meals from a restaurant will be 100% deductible for 2021 and 2022, rather than 50%.
2
Above-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
The 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
A 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
Favorable depreciation rules for taxpayers electing out of tax code Section 163(j) business interest expense limitation rules.
6
Educators’ deductible costs now include personal protective equipment and other coronavirus prevention related supplies.
7
Farmers 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
The 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
Taxpayers 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.

Human Reources, Payroll tax & Compliance

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.

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