Guidance Issued on Deferral of Employee Social Security Taxes

On August 28, 2020, additional guidance from the Department of Treasury and the Internal Revenue Service regarding the President’s Executive Order on the employee deferral of Social Security tax for 9/1/20 through 12/31/20 was issued.  The guidance can be found for IR-2020-195 can be found here  https://www.irs.gov/pub/irs-drop/n-20-65.pdf

The brief update stated that relief from the employee’s 6.2% Social Security tax would be available for any paycheck in which gross wages were under $4,000 in a bi-weekly period (or an equivalent amount of pay on a different pay cycle).  The eligibility will be determined on a payroll by payroll basis, and the deferral will only be available if the gross payroll for the employee is under that threshold ($4,000 bi-weekly, $4,333 semi-monthly, $8,666 monthly, $2,000 weekly).

The deferral will essentially postpone the time for employers to withhold and pay the employee portion of Social Security tax until January 1 – April 30, 2021 (withheld ratably during that time period), or interest, penalties and additions to tax will begin to accrue on May 1, 2021.  If necessary, the employers may make arrangements to otherwise collect the total deferred taxes from the employee.

The option is at the employer level as to whether or not to participate in the deferral option.  However, it is not clear if employees have the option to elect out of the deferral at an individual level if an employer does choose to proceed with participating in the deferral at the company level.  In order to protect the employer and employee and to ensure sure that all parties understand the implications of the deferral, we would recommend the following steps be taken by the employer should they opt to participate in the deferral:

  • Make sure the employees understand it is expected that the deferred Social Security taxes will have to be paid back between Jan 1 – April 30, 2021.
  • Have employees sign a contract agreeing to the additional withholding up to twice the normal amount of Social Security taxes in the period of Jan 1 – April 30, 2021.
  • Include in the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to all of the deferred taxes being repaid.
  • Have a plan in place to account for the repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he/she earned in 2020.
  • Make sure your payroll team understands its obligations for adjusting paychecks to reflect the deferral and for adjusting paychecks in 2021 to repay the deferred amount.

SBA Issues 23 New PPP FAQs

CARES Act Provider Relief Fund Now Available for Dentists

The Provider Relief Funds supports American families, workers, and the heroic healthcare providers in the battle against the COVID-19 outbreak. HHS is distributing $175 billion to hospitals and healthcare providers on the front lines of the coronavirus response. Dentists did not originally qualify in this group. The ADA and AAO (American Association of Orthodontists) lobbied for these funds to be available for dental practices, and on July 10, were approved to apply.

The grant/stimulus money is based on your most recent tax return revenues, up to 2%. The application is simple and completed online. Applicants need to have their last 3 years of tax returns to upload. The application is attached so you can see what questions are asked. Please visit CARES Provider Relief Fund for more information.

Economic Resiliency Grant Now Available

The North Dakota Department of Commerce have made the Economic Resiliency Grant available to private companies operating in North Dakota for costs associated with improvements to their businesses for the purpose of reducing the spread of infection, and instilling consumer confidence in the marketplace. To clarify, this is a grant, and not a loan. Grants will be awarded at up to $50,000 per eligible business and up to $100,000 per eligible business with multiple locations. Visit Economic Resiliency Grant to find out how to apply.

COVID 19 Tax and Other Relief Provisions for Financial Institutions

Community Bank Leverage Ratio

The office of the Comptroller of the Currency (OCC), along with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (collectively, the agencies) have approved an interim final rule as of April 6, 2020 that makes temporary changes to the community bank leverage ratio framework (CBLR framework), pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and a second interim final rule that provides a graduated increase in the community bank leverage ratio requirement after the expiration of the temporary changes implemented pursuant to section 4012 of the CARES Act. Note: This interim final rule applies to qualifying community banks with less than $10 billion in total consolidated assets that meet other criteria and opt into the CBLR framework.

Under the rule, the CARES Act reduces the Community Bank Leverage Ratio (CBLR) to 8% from the previous minimum of 9%. The two interim final rules modify the CBLR framework in the following ways:

  • The leverage ratio requirement will be 
    • 8 percent or greater, effective the second quarter of 2020.
    • greater than 8.5 percent, effective January 1, 2021.
    • greater than 9 percent, effective January 1, 2022.
  • A bank that elects to use the CBLR framework but temporarily fails to meet all of the qualifying criteria, including the leverage ratio requirement, will have a two-quarter grace period to return to compliance, provided that the bank maintains a leverage ratio of 
    • 7 percent or greater, effective the second quarter of 2020.
    • greater than 7.5 percent, effective January 1, 2021.
    • greater than 8 percent, effective January 1, 2022.
  • A bank that that fails to meet the grace period minimums must immediately apply the risk-based capital standards.

S-Corporation Distributions

An interim rule permits S-Corporation banks to pay distributions to their shareholders despite being in the “buffer zone” in relation to Basel III.  Prior to the interim rule, banks who wish to make these distributions while being in the “buffer zone” would have to obtain prior approval from the applicable bank regulators.

Tax Credits and Payroll Tax Considerations

The Employee Retention Credit (ERC) is a refundable credit of up to $5,000 per employee for those eligible employers who retained their employees during COVID-19.  The time period includes wages paid from March 13, 2020 to December 31, 2020.  Note that employers who participated in the Paycheck Protection Loan (PPP) program are ineligible for the credit.  Institutions will have to show either a 50% reduction in 2020 gross receipts compared to the same quarter in 2019 or whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings due to COVID-19. Click here for more information. 

In addition to the ERC, banks will have the opportunity to defer payments of the employer portion of Social Security taxes on employee wages incurred from March 27, 2020 through December 31, 2020.  Half of the amount deferred would be payable by December 31, 2021 and the other half by December 31, 2022.  Note that employers are ineligible for this deferral for those who have a PPP loan debt forgiven (up to the point of forgiveness the deferral is available).  The amount that is deferred would have to be recorded on the balance sheet as the amount has still be incurred. Click here for more information. 

Other areas to focus on for tax savings is changes in the net operating loss rules (NOLs) generated in 2018, 2019, and 2020.  These losses can be carried back five years.  Not only can this provide permanent tax savings by applying the NOLs to years in which the tax rates are higher but it can also reduce the deduction from capital on the Call Report is the deferred tax asset is converted to an income tax receivable.   Lastly, deferred tax assets that are attributable to NOLs are not included in Tier One capital under regulatory guidelines.  For banks that have leasehold improvements the CARES Act updated tax depreciation on leasehold improvements to be eligible for 100% bonus depreciation starting in 2018. Click here for more information. 

Please contact a Brady Martz financial institution team member with additional questions.  Our team is here to help.